Employers who have sought to provide retirement benefits to their employees in the past may have struggled with, or even been deterred by, difficult and costly administrative processes. To help alleviate this pressure, Congress enacted the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019, introducing pooled employer plans (PEP) — a form of multiple employer plan (MEP) that offers eligible employers a streamlined and cost-effective way to provide high-quality retirement savings vehicles for their employees. Since January 1, 2021, companies in unrelated industries have had the option of participating in PEPs as an alternative retirement plan structure.
As interest in PEPs grows, scrutiny from the Department of Labor (DOL) has increasingly focused on compliance concerns. This could lead to a corresponding increase in enforcement actions related to these plans. In the following article, we provide fundamental information about PEPs, as well as updates on regulatory requirements.
The Prologue: Pooled Employer Plans and How They Work
The rationale underpinning PEPs is that companies can benefit from their pooled buying power to lower administrative and investment costs. Employers can also transfer some fiduciary liabilities and administrative burdens to third-party pooled plan providers.
As the ERISA-named fiduciary for the plan, the Pooled Plan Provider (PPP) must operate the PEP in the best interests of the participants. Responsibilities include assuming administrative duties, filing the annual Form 5500 on behalf of the participating employers, and responding to audits and investigations conducted by the DOL and/or Internal Revenue Service (IRS). Additionally, the pooled plan provider must be insured. Depending on how the plan is designed, the PPP may also serve in the role of 3(38) investment fiduciary, allowing it to develop the PEP investment policy, as well as select, monitor, and replace the PEP investment options.
Participating employers are responsible for selecting an initial provider that is qualified to administer the plan, as well as for continuing oversight and monitoring of the PEP and its performance. It is critical to the plan’s operations that participating employers provide accurate data to the PPP, including new hire dates, deferral amounts, loan repayments, and more. Remitting contributions to the PEP on time and providing complete and accurate contribution data are also responsibilities that fall to the employers.
The Story Begins: Creating a New Retirement Option
The SECURE Act includes provisions aimed at increasing access to workplace retirement plans through the creation of PEPs. Specifically, the law seeks to address some of the restrictions and perceived drawbacks of MEPs, while creating new benefits for PEP participants.
In addition to reducing administrative and fiduciary burdens, PEPs offer several potential benefits, including:
- Tax Credits: Eligible employers can receive up to $5,000 in tax credits to offset startup costs and an additional $500 tax credit annually for the first three years for automatically enrolling participants in the plan.
- Bad Apple Rule: The SECURE Act also eliminated what many employers considered an obstacle to joining a MEP: the “one bad apple” rule. Historically, the entire MEP could be disqualified if a single participating employer failed one of the many plan qualification rules. But with a PEP, the failure of one employer to meet qualification requirements will not automatically disqualify the entire PEP. The SECURE Act provides a remedy if the PEP can show that it has a corrections program and has taken steps to address the failure.
While PEPs began improving the retirement outlook for employers and employees in 2021, more changes were on the horizon.
The Story of Pooled Employer Plans Continues
The SECURE Act was amended by the Securing a Strong Retirement Act of 2022, commonly referred to as SECURE 2.0. Several provisions in SECURE 2.0 are favorable to PEPs, effective for plan years beginning after December 31, 2022:
- Section 102 enhances the startup tax credit provided in the SECURE Act for employers with up to 50 employees. The startup credit increases from 50% to 100% of eligible startup costs, with a $5,000 annual cap for the first three years.
- Section 102 also introduces a new credit that applies to employers with up to 50 employees who contribute to new defined contribution plans. A $1,000 credit per employee is currently available, although that amount phases out for employers with 51 to 100 employees.
- Section 105 clarifies that a PEP may designate a named fiduciary to collect contributions to the plan. Such fiduciary — that does not have to be an employer in the plan — must implement written contribution collection procedures that are reasonable, diligent, and systematic.
- Section 106 extends relief from the “one bad apple” rule mentioned above to 403(b) plans, which are generally sponsored by charities, educational institutions, and nonprofit organizations.
- Section 106 also expands PEP access to 403(b) Plans, allowing access for many nonprofit organizations and educational institutions. Previously, PEPs were only available for 401(k) plans.
While SECURE 2.0 has played a part in improving retirement plan options available to small businesses, some questions remain.
A New Chapter: Clarifying Form PR, Form 5500, and Annual Audits
The PEPs story wouldn’t be complete without mentioning Form PR, as well as clarifying Form 5500 and annual financial statement audit requirements.
All pooled plan providers must file a Form PR (Registration for Pooled Plan Provider) based on current regulations. This form is filed electronically with the DOL and IRS through EFAST2, and the Acknowledgment ID (AckID) issued for the filing can be used to confirm compliance.
As for Form 5500, which must be filed annually, PEPs are required to file a Form 5500, not a Form 5500-SF. Individual participating employers do not file separate Forms 5500 for their portion of the PEP; instead, one form is filed that covers all participants in the plan.
Some initial confusion existed over whether the audit threshold for PEPs referred to the entire plan or each participating employer. Under ERISA, employee benefit plans with 100 or more participants are required to conduct an annual audit, and, although structured differently than single-employer plans, PEPs are no exception. The DOL has confirmed that the audit threshold applies to the entire plan and that plans are still subject to the 80-120 rule.
A Final Word on Pooled Employer Plans
Pooled employer plans are not for everyone but can be a game changer for eligible employers and their employees. Our Employee Benefit Plan Audit team can help review your ERISA benefits plan, conduct your annual audit, and offer advice on maintaining compliance with existing regulations while keeping watch for additional updates.
Note: The American Institute of Certified Public Accountants (AICPA) is preparing guidance for PEPs, although an estimated publication date is not available at the time this article was written. We will provide an update after the guidance is issued.