Establishing a retirement plan for your business and the staff you employ can be very expensive and time-consuming, leading many companies to forego retirement benefits for their employees. But this limitation is sometimes at the detriment of the employee. According to the U.S. Department of Labor, retirement planning options are only available to 53 percent of employees at small businesses (businesses with less than 100 workers).1
To resolve the challenges of retirement planning, MEPs (multiple employer plans) sought to create cost-effective options for small businesses. However, traditional MEPs have suffered from restrictions that make them less attractive to many small businesses.
The SECURE Act, which passed in December 2019, hopes to resolve small business retirement challenges by adjusting traditional restrictions and establishing a new form of MEP - the PEP (pooled employer plan).
What Is a Multiple Employer Plan?
Multiple employer plans (MEPs) are retirement plans available to businesses within a similar industry (food service, construction, etc.).2 Historically, MEPs suffered from the “unified plan rule,” or as it’s commonly referred to, the “one bad apple” rule. This rule would have disqualified an entire retirement plan if one employer violated compliance.
How the SECURE Act Affects MEPs
With the introduction of the SECURE Act, MEPs benefited from a variety of changes to make them more attractive to smaller businesses.
Some of the largest changes include:
- Making it easier to establish an MEP 2
- Providing protection against the “One Bad Apple” rule 3
- Establishing a new form of MEP - the PEP, or “pooled employer plan”
What Is a Pooled Employer Plan?
As an extension to the original MEP, PEPs are required to follow the same set of regulations and requirements as a MEP. The benefit of a PEP is it allows businesses from different industries to establish retirement options similar to a traditional MEP. 2 This provides employers with the opportunity to establish potentially superior retirement options at a lower cost by combining their collective purchasing power.
However, PEPs also have their own unique restrictions, including:
- Limited to the use of 401(k) plans
- Must be administered by a “pooled plan provider” 2
What Is a Pooled Plan Provider?
A pooled plan provider is responsible for the sponsorship and management of an employer’s retirement plan and must be sponsored by a financial service company and registered with the Secretary of Labor and Secretary of the Treasury.1 Pending this registration, providers could begin supplying PEPs as of January 1st, 2020. 1
MEP vs. PEP
The biggest difference between the base MEP and the addition of a PEP is a trade-off of increased buying potential at the cost of retirement plan options. In addition, unlike traditional MEPs, PEPs allow businesses to go outside of their industry, but restrict members to the use of a 401(k) plan. Together, these differences can reduce the overall cost of both compliance and administration, allowing businesses that would not benefit from a pre-SECURE Act MEP to have a competitive option for establishing retirement benefits through a PEP.
Remembering these differences can help your business determine the best option for saving money while still providing your employees with superior retirement benefits.
Beacon Hill Private Wealth is an independent, fee-only, fiduciary investment advisor providing evidence-based wealth planning solutions that simplify our clients' financial lives. Founder Tom Geoghegan, CFP® CPWA® MBA is also a member of the National Association of Personal Financial Advisors (NAPFA).
The Certified Private Wealth Advisor® (CPWA) certification administered by the Investments & Wealth Institute® is the standard for competence in the field of wealth management today. The advanced credential created specifically for wealth managers working with high-net-worth clients is focused on the life cycle of wealth—accumulation, preservation, and distribution. CPWA certified professionals are able to identify and analyze the unique challenges high-net-worth individuals face and understand how to develop specific strategies to minimize taxes, monetize and protect assets, maximize growth, and transfer wealth. The CPWA designation signifies that an individual has met initial and on-going experience, ethical, education, and examination requirements for the professional designation, which is centered on private wealth management topics and strategies. Fewer than 1% of financial advisors have achieved the CPWA certification.4
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