An MEP is a retirement plan that two or more employers adopt. These can benefit smaller companies struggling to provide retirement plans due to cost, complexity and liability. MEPs can reduce fiduciary responsibility, reporting and paperwork requirements, making retirement plans easier on small to mid-size employers. On July 29, 2019, the DOL issued a final rule that seeks to widen MEP accessibility. While some might assume this means instant relief for the 40 million Americans without 401(k) plans, we’re not there yet. Let’s take a deeper dive into this issue to better understand multiple employer plans and the DOL’s final rule.
Open, Closed and the Final Rule
Multiple employer plans fall under two categories: open or closed. An open MEP is accessible to companies regardless of similarities or geographic proximity to one another. Prior to the final rule, closed MEPs required that participants share strong similarities (such as membership to an association) or work in the same industry. They also had to operate within a certain distance of one another. Under the final rule, members no longer have to satisfy both relatedness and geographic requirements. Closed MEPs can now be formed by companies that are in the same industry or operate in the same area. In addition, the final rule allows some sole proprietors to participate in an MEP even if they have no employees.
Another big change stemming from the final rule is an expanded definition of “employer.” The final rule now includes professional employer organizations (PEOs) as eligible MEP sponsors. Previously, there wasn’t clear guidance as to whether or not a PEO could act as an employer for purposes of sponsoring an MEP. The final rule does clarify that a PEO must meet other standards such as performing “substantial employment functions” to qualify.
More Change Needed
The DOL’s effort to broaden closed MEP eligibility is a good step toward ensuring more people have access to retirement plans. However, more work needs to be done. The rule still requires organizations to form their own plans, which can be tricky for those who don’t belong to a PEO or an association willing to sponsor a plan. Similar companies (who are often competitors) can struggle to find common ground and establish a plan that benefits all. Therefore, while the closed MEP rule changes are positive, they may not have a significant impact. In order to reach more working Americans, the DOL should create more leniency with open MEPs.
The current challenge with an open MEP is that it isn’t considered a singular plan under the Employee Retirement Income Security Act of 1974 (ERISA). Therefore, each employer in the plan must satisfy all ERISA requirements. This leaves little incentive for small employers to join an open MEP because of the administrative burden and risk. If the DOL provided an open MEP with the same protection as a closed MEP, it would be viewed as one plan. The small employer could then take advantage of the economies of scale and achieve lower overall costs. They would also be able to outsource the administration and risk to a plan sponsor and its consulting fiduciaries. Employers from any industry could access an open MEP, so there would be less concern about commonality or competitive issues. It’s also worth noting that an open MEP can reduce one of the main burdens of offering a retirement plan – the cost of setting one up.
As the labor market becomes more competitive, more small companies are feeling the pressure to offer a retirement plan. But many find that the initial investment (not including the match) can be cost prohibitive. This puts employers in a tough position as they try to decide what investments will help their companies grow. While the DOL’s final rule is a good start, revisions to open MEP rules could create an easier path for small businesses. We’ll continue to follow this topic closely and provide updates on any future changes to multiple employer plans.
* “Workplace Retirement Plans Tend to Sharpen Focus on Financial Futures.” February 7, 2019. PEW website. Accessed on November 18, 2019
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