What Is a Multiple Employer Plan and How Does It Work?

Multiple Employer Plans (MEPs) are becoming an attractive retirement savings option for businesses. These plans enable multiple employers to pool resources, reducing administrative burdens and costs compared to maintaining individual retirement plans. As the regulatory landscape evolves, understanding MEPs is essential for businesses aiming to offer competitive benefits efficiently.

This article examines key aspects of Multiple Employer Plans, focusing on their structures, contribution arrangements, and compliance requirements.

Eligibility and Participation

Eligibility and participation in Multiple Employer Plans (MEPs) are governed by regulatory frameworks. The SECURE Act of 2019 eliminated the “nexus” requirement, which previously limited participation to employers with a common interest. Now, businesses of various sizes and industries can join MEPs, making them a versatile retirement solution.

MEPs are particularly advantageous for small to mid-sized businesses that might struggle to manage standalone plans. By joining a MEP, employers benefit from reduced administrative costs and access to broader investment options. However, thorough due diligence is essential. Employers must evaluate the plan’s governance, fee structure, and service providers to ensure alignment with organizational objectives.

Employee eligibility depends on the plan’s provisions, which may include age and service requirements. Common criteria include employees being at least 21 years old and completing one year of service, though some plans allow earlier participation. Employers should clearly communicate these criteria to ensure employees are informed and engaged.

Plan Structures

MEPs are designed to streamline operations and reduce administrative burdens for participating employers. Centralized plan administration simplifies tasks like recordkeeping, compliance monitoring, and reporting, making MEPs appealing to many businesses.

The plan sponsor, often a professional employer organization (PEO) or an association, plays a critical role in overseeing the plan. This entity assumes fiduciary responsibility, selecting and monitoring service providers, ensuring investment options meet participant needs, and maintaining compliance with the Employee Retirement Income Security Act (ERISA) and other regulations. The sponsor’s effectiveness directly impacts the plan’s success and attractiveness.

MEPs also offer flexibility in plan design, allowing employers to customize features like vesting schedules, employer matching contributions, and loan provisions. For instance, an employer might adopt a vesting schedule to encourage employee retention. This adaptability, combined with the cost savings of a pooled arrangement, helps employers provide competitive benefits tailored to their workforce.

Contribution Arrangements

Contribution arrangements are a cornerstone of Multiple Employer Plans (MEPs), allowing employers to design strategies that align with their financial goals and workforce needs. Employer matching contributions, for example, can incentivize participation and retention. A tiered matching system, increasing contributions with employee tenure, is one such approach.

Contribution limits for MEPs follow the same rules as traditional 401(k) plans, with limits adjusted annually for inflation. In 2024, the elective deferral limit is $23,000, with an additional $7,500 catch-up contribution for participants aged 50 and older. Employers must ensure contribution arrangements comply with nondiscrimination testing to avoid penalties.

Tax benefits enhance the appeal of MEPs. Employer contributions are typically tax-deductible, and employee contributions grow tax-deferred. Employers should consult tax advisors to optimize contribution strategies, balancing current tax advantages with long-term implications.

Fiduciary Responsibilities

Fiduciary responsibilities are central to the operation of Multiple Employer Plans (MEPs). Under ERISA, fiduciaries must act solely in the interest of plan participants, managing plan assets prudently and adhering to plan documents. This requires expertise and diligence, often involving consultation with financial or legal professionals.

A key fiduciary duty is selecting and monitoring investment options to ensure diversification and minimize risk. Regular reviews of investment performance and timely adjustments to align with market conditions or participant needs are essential. Proactive management reduces liabilities and fosters participant confidence.

Compliance Requirements

Compliance is critical for maintaining the integrity of a Multiple Employer Plan (MEP). Oversight by ERISA and the Internal Revenue Code (IRC) imposes specific obligations on plan sponsors and administrators. One key requirement is the annual filing of Form 5500, which consolidates reporting for all participating employers. Accurate reporting is essential to avoid audits and penalties.

MEPs must also pass nondiscrimination testing to ensure plans do not disproportionately benefit highly compensated employees (HCEs). Tests like the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) are conducted annually. Failure can lead to corrective actions, such as refunding excess contributions to HCEs or making additional contributions for non-highly compensated employees (NHCEs).

Fiduciary bonds, required by the Department of Labor (DOL) and IRS, protect against fraud or dishonesty. Bonds must equal at least 10% of the plan’s assets, up to $500,000 or $1 million for plans with employer securities. Additionally, MEPs must provide participants with disclosures like Summary Plan Descriptions (SPDs), fee disclosures, and benefit statements to ensure transparency. Employers should prioritize compliance readiness to mitigate risks and maintain the plan’s benefits.

Exiting or Transitioning

Exiting or transitioning from a Multiple Employer Plan (MEP) requires meticulous planning to avoid disruptions and ensure compliance. Employers may exit due to strategic changes, dissatisfaction, or a decision to establish a standalone plan. Regardless of the reason, the process must be carefully managed to minimize liabilities and maintain participant trust.

The first step is reviewing the plan’s governing documents, which outline withdrawal procedures. Employers must provide notice to the plan sponsor and other participants as specified. During this time, employers should coordinate with the sponsor to transition participant accounts, whether transferring assets to a new plan or distributing them directly. Outstanding compliance obligations, such as finalizing contributions and resolving nondiscrimination testing results, must also be addressed.

Transitioning to a standalone plan involves selecting service providers, designing the plan, and ensuring compliance with ERISA and IRC requirements. Employers must file a new Form 5500 and establish fiduciary oversight. Clear communication with employees is essential, emphasizing the benefits of the new arrangement and addressing concerns. In cases of plan termination, employers must follow rules under IRC Section 411(d)(3), requiring full vesting of participant benefits. Legal and financial advisors can help navigate this process, ensuring a smooth transition that upholds fiduciary responsibilities.