3770 / What do employers evaluating the MEP options have to know about various plan options after passage of the SECURE Act?

Beginning in 2021, under the SECURE Act, employers can to offer MEPs, association retirement plans (ARPs) and pooled employer plans (PEPs). Clients should understand the difference between the type of MEP available pre-2019, the MEP structure created by the 2019 DOL regulations and the different MEP rules that apply beginning in 2021 under the SECURE Act. Technically, these are all different types of plans with different requirements that must be evaluated. The DOL-created plans have been called “association retirement plans” (ARPs) to differentiate from the original “closed” MEP, and to clarify that ARPs must satisfy additional criteria in order to be treated as qualified plans. Under the SECURE Act, MEPs are also called pooled employer plans (PEPs)—another name for a type of MEP that meets certain additional requirements to avoid the commonality of interest requirement and one bad apple rule.

Pre-2019, to participate in MEPs, all participating employers were required to share some strong type of common interest separate and apart from the retirement plan itself. The need to share some type of affiliation or participate in the same industry sharply limited the availability of the “original” MEP—also called a “closed” MEP.

The basic premise behind the idea of MEPs has remained the same—multiple small businesses join together to reduce the administrative burden and potential fiduciary responsibilities of offering a 401(k)-type retirement plan. The DOL 2019 regulations expand MEP availability if certain criteria are satisfied. Some in the industry began referring to these new MEPs as association retirement plans (ARPs) to differentiate from the original “closed” MEP, and to clarify that ARPs must satisfy additional criteria in order to be treated as qualified plans. Essentially, the ARP is a type of MEP, and the terms have mostly been used interchangeably.

Under the ARP structure, employers that share only the same geographic location or industry are permitted to join together in the MEP-ARP. The participating employers can be located in the same city, county, state or even multi-state region. Companies operating in the same industry can join together even if they operate in entirely different regions. The ARP can be sponsored by a permitted group of employers if certain formalities are satisfied (the organization of employers must be bona fide, with organizational documents and control over the ARP in substance and in form, directly or indirectly, among other requirements).

In the alternative, ARP members can now join together in a plan sponsored by a professional employer organization (PEO). See Q and Q .

While the 2019 regulations were broadly seen as beneficial to interested small business owners, employers who choose this type of plan structure may continue to be subject to the “one bad apple” rule (but see Q ).

Congress enacted the SECURE Act to even further ease the restrictions on the types of employers who can join together, assuming additional criteria are satisfied, and eliminate some of the risks associated with MEPs. The SECURE Act permits MEP participation for employers who share no common interest apart from the desire to offer a retirement plan and eliminates the one bad apple rule.

Under the SECURE Act, these types of MEPs are also called pooled employer plans (PEPs)—another name for a type of MEP that meets certain additional requirements to avoid the commonality of interest requirement and one bad apple rule. The MEP-PEP, or open MEP, will be treated as a single retirement plan, so that the group will only be required to file a single Form 5500 to further reduce the administrative burdens for each of the individual employer-
participants.

This type of “open MEP” must be administered by a pooled plan provider (generally, a financial services firm). Use of the pooled plan provider to act as both plan administrator and a fiduciary with respect to the plan is intended to ease both the administrative burden and fear of fiduciary liability for small business owners.

The pooled plan provider must register as a fiduciary with the Treasury Department and the DOL. The pooled plan provider also must have a trustee responsible for monitoring contributions and dealing with subsequent issues that arise.  The SECURE Act 2.0 clarified these rules to allow the plan to designate any named fiduciary, other than the participating employer, as the fiduciary responsible for contribution collections (this provision was effective as of December 31, 2022).  The fiduciary is required to implement reasonable and diligent collection procedures.

Small business clients should understand that, as employer, they continue to bear fiduciary responsibility with respect to selecting and monitoring the pooled plan provider. Pooled plan providers can outsource investment decisions to another fiduciary (likely what is known as a “3(38) fiduciary”). This arrangement does spread the costs of investment advice among the MEP participants to reduce expenses, but the extent of the employer’s fiduciary exposure still remains unclear under the law.