For more than seven years now, policymakers and taxpayers have clamored for Congress to change the law to permit “open” multiple employer plans (MEPs) – that is, retirement plans that are adopted by multiple unrelated employers (including employers with no nexus or common association) and may be sponsored and administered by an employer plan sponsor or by an unrelated firm. While recent regulatory changes (discussed in our recent publication, Multiple Changes for Multiple Employer Plans) broadened the community of employers that can be served by and offer MEPs that can be treated as single plans under current rules, these changes still did not permit truly “open” MEPs. Now, the SECURE Act (the Setting Every Community Up for Retirement Enhancement Act of 2019), which was signed into law on December 20, 2019, as part of the Further Consolidated Appropriations Act, 2020 (HR 1865, Public Law No. 116-94), helps to fill that gap by authorizing a new form of open MEP called a “pooled employer plan” or “PEP.”
A PEP is (1) an individual account plan (2) established or maintained by a “Pooled Plan Provider” (defined below) for the purposes of providing benefits to the employees of two or more employers, which (3) is a plan described in Section 401(a) of the Internal Revenue Code of 1986, as amended (the Code) or which consists of individual retirement accounts under Code Section 408, and (4) includes certain specified terms in its plan document. These requirements are discussed in more detail below.
Under the SECURE Act, the following requirements apply for an entity to qualify as a pooled plan provider (PPP):
Entities that are in a controlled group with the PPP and that perform services for the PEP are treated as the PPP for certain purposes under the SECURE Act. In addition, the PPP must also subject itself to audit, examination, and/or investigation by Treasury and the DOL.
Importantly, despite these various compliance obligations and requirements, a PPP does not need to be in a controlled group or affiliated with participating employers. This opens the door for retirement services firms of different types (such as insurance companies, banks, trust companies, consulting firms, record keepers, third-party administrators and associations, among others) to provide PEPs to their clients.
Broadly speaking, there are no restrictions on the employers that can participate in a PEP. Previously, employers participating in traditional MEPs were required to satisfy a commonality or “nexus” requirement (for example, unrelated employers were required to be engaged in a common industry or located in geographic proximity). Notably, unrelated employers can now participate in a PEP without satisfying any commonality or nexus requirement.
Employers may weigh the benefits of a MEP against the benefits of maintaining their own individualized retirement plans. For example, larger employers may already have the benefit of economies of scale and may appreciate the opportunity to offer unique features, such as company stock, custom investment options, and open architecture platforms. In addition, investment providers widely offer investment pooling and commingling solutions, and fiduciary outsourcing solutions are also widely offered to help mitigate fiduciary obligations.
Traditional MEPs have been subject to what is referred to as the “one bad apple” rule – the risk that if one participating employer fails to meet its obligations with respect to its portion of the MEP, the tax qualified status of the entire MEP, even for unrelated participating employers, could be jeopardized as well. Treasury recently proposed a regulation to alleviate this risk, but the regulation has not been finalized.
Taking an approach similar to the proposed Treasury regulation (which actually came out after the SECURE Act had been introduced), the SECURE Act mitigates this risk for PEPs. Under the new law, if certain requirements are met, a PEP will not be treated as failing to meet the PEP requirements solely because a participating employer fails to meet its obligations to the PEP. In particular, the PEP’s terms must provide that in the event of such a failure, assets attributable to that employer are transferred out of the PEP to another retirement plan or account, which may be (1) a single-employer plan sponsored by that employer, (2) IRAs or other eligible individual retirement plans of the affected employees, or (3) any other arrangement determined appropriate by Treasury and/or the DOL, unless Treasury and/or the DOL determines that it is in the “best interests” of the employees to retain the assets in the PEP. In addition, the offending employer, and not the PEP or other participating employers, will be responsible for any associated liabilities resulting from the failure.
This rule raises additional questions on which we would expect further regulatory guidance. For example, the PPP could have fiduciary obligations for the transfer of assets to the single-employer plan or to eligible individual retirement accounts. Absent further DOL guidance on the applicability of these rules to PEPs, the PPP may wish to comply with the safe harbors for automatic rollovers to individual retirement plans or distributions from terminated individual account plans under DOL regulations and the related prohibited transaction class exemption.
A PEP plan document must
Whereas an open MEP that does not qualify as a traditional MEP under current DOL rules would be required to file a Form 5500 for each participating plan, a PEP may file a single Form 5500 annual report for the entire plan.
Generally, PEPs must include in their Form 5500 annual reports (1) a list of participating employers and a good faith estimate of the percentage of total contributions made by each such employer during the plan year and the aggregate account balances attributable to each participating employer, and (2) identifying information for the entity designated as the PPP.
The SECURE Act provides that the DOL may by regulation permit PEPs that cover fewer than 1,000 participants to file a simplified Form 5500; provided, however, that no more than 100 participants are attributable to any single participating employer. Until such regulations or similar rules are issued, presumably all PEPs will be required to file full Forms 5500 as described above.
The SECURE Act directs both Treasury and the DOL to issue guidance regarding certain PEP-related provisions of the new law. Further, the SECURE Act directs Treasury to issue model language for PEP plan documents. Until such guidance is issued, employers and PPPs will not be treated as violating the applicable provisions of the law provided that their actions are based on a good faith, reasonable interpretation of such provisions.
In operation, we anticipate that a number of providers that are already heavily involved in the defined contribution retirement plan marketplace will register as PPPs and start making PEPs available to prospective participating employers. Simultaneous with this registration process, the PPPs will prepare PEP plan documents and otherwise establish the investment and administrative framework necessary to sponsor the PEP. This startup process likely will take some time and may be facilitated (or impeded) to some degree by guidance issued by the DOL or Treasury. However, given the potential market for PEPs (for example, many small and mid-sized employers that do not currently sponsor retirement plans or that are frustrated by the burdens and complexity of administering plans), we anticipate that many providers will establish PEP product offerings and appoint and retain administrators, investment advisors and investment managers for their respective PEPs.
While PEP compliance risks will become more evident over time, there are certain compliance issues for PPPs and prospective participating employers to consider at the outset. For example:
While PEPs may confront legal and logistical hurdles along the way, they potentially represent an attractive opportunity for both participating employers and PPPs. Participating employers, including small employers that have never before sponsored a retirement plan, may wish to take advantage of significant economies of scale, lower costs, and streamlined administration available through PEPs that traditionally have been available only to large-sized employers and plans. As such, aspiring PPPs may find a significant untapped marketplace.
The SECURE Act’s revisions to the Code and ERISA described above are effective December 31, 2020. However, the legal requirements and administrative steps to establish a PEP are complex and potentially time consuming. Thus, aspiring PPPs should dive right in to begin analyzing whether sponsoring a PEP makes sense for them.
Please contact the authors or the following Morgan Lewis contacts if you need assistance navigating the PPP registration process or if you have questions about designing, administering, or participating in a PEP:
 While 403(b) MEPs are becoming more prevalent, the clarity and certainty of the PEP rules may encourage tax-exempt employers to consider adopting a 401(a) PEP to avoid still unsettled issues confronting 403(b) MEPs, which were not addressed by the SECURE Act.
 Note that the term “multiple employer plan” should not be confused with a “multiemployer plan” – that is, a plan for more than one employer maintained pursuant to one or more collective bargaining agreements. The term “multiple employer plan” is commonly used to describe a plan for multiple employers that is not a multiemployer plan.