On December 20, 2019, President Trump signed into law a spending bill that included the passage of the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”). The SECURE Act increases access to retirement plans for small employers by removing barriers for multiple employer plans, allowing for truly open multiple employer plans in the form of plans the Act calls “Pooled Employer Plans” or “PEPs.”
PEPs are tax-qualified, multiple employer retirement savings plans that almost any employer may join. PEPs are beneficial to small employers because a single plan with multiple employers can reduce plan costs, enhance the quality of plan administration and fiduciary oversight, and simplify the complex process of establishing a savings plan for employees.
While multiple employer plans were available prior to the SECURE Act, the statutory law and agency guidance made them incredibly difficult to establish and maintain. The Department of Labor (DOL) required employers in a multiple employer plan to have a “common nexus,” meaning employers in a multiple employer plan needed to share a non-plan commonality, such as being members of a trade association. Multiple employer plans were also subject to the “one-bad-apple” rule, whereby one participating employer’s violation of the qualification requirements could jeopardize the entire plan. Although the DOL and the Internal Revenue Service (IRS) recently attempted to liberalize the common nexus requirement and one-bad-apple rule through revised rules, the SECURE Act removes these hurdles altogether.
Multiple employers, regardless of economic nexus, may now join a single
PEP that is administered by a “Pooled Plan Provider”. The Pooled Plan Provider serves as the PEP’s named fiduciary and plan administrator. Further, the PEP rules replace the one-bad-apple rule with a procedure allowing PEPs to separate the assets of a noncompliant employer from the plan, allowing the plan to retain its tax-qualified status. The PEP rules remain subject to further IRS interpretation and guidance as required under the SECURE Act, but are clearly intended to remove the two most significant barriers to multiple employer plans.
By removing legal hurdles to operating open multiple employer plans, PEPs will allow small employers who otherwise could not afford to offer a 401(k) plan to combine resources with other employers and provide employees more access to retirement savings opportunities.