Retirement Plan Access Expanding for Small Businesses
According to the U.S. Department of Labor (DOL), approximately 38 million private-sector employees do not have access to a retirement plan through their employer due to high administrative costs and burdensome compliance requirements. The DOL recently took steps to ease this burden by issuing a final rule that helps small businesses provide employees with retirement plan access.
Through the clarification of what constitutes an “employer”, the DOL’s ruling now allows more small businesses to join together to offer a retirement plan to their employees. A bona fide group, association or professional employer organization (PEO) can now act as an “employer” and sponsor a defined contribution retirement plan for its members. These plans are collectively referred to as multiple employer plans (MEPs) and this ruling, which goes into effect on September 30, 2019, specifically authorizes multi-employer plans (MEPs) through two arrangements:
- Association retirement plans (ARPs): formed when existing organizations such as local chambers of commerce or associations join to administer the MEP.
- Professional employer organizations (PEOs): contractually assume many employment responsibilities for their client employers. The final rule provides clear authorization for PEOs to form MEPs by creating a new safe harbor under the Employee Retirement Income Security Act (ERISA), which governs employer-sponsored retirement plans.
Opening Up MEPs
Prior to this final rule, the DOL only permitted “closed” MEPs in which participating employers had to share “a nexus of interests” or common relationships, such as being members of an established trade association. Under the new rule, the expanded parameters allow employers to join an ARP if they meet one of the following criteria:
- Operate in a common city, county or state—or in a multistate metropolitan area—regardless of their trade, industry or profession.
- Operate in the same trade, industry or profession, regardless of where they are located.
In May, the House of Representatives passed legislation to further open MEPs to unrelated employers via the Setting Every Community Up for Retirement Enhancement (SECURE) Act. An important component of the SECURE Act is penalty protections for companies in MEP when other members violate fiduciary rules.
The SECURE Act would allow businesses that aren’t located in a common geographic area and don’t share a common trade, industry or profession, to join an MEP. Additionally, the SECURE Act would allow MEPs to be administered by a “pooled plan provider”, such as a financial services firm, in addition to associations or PEOs.
Liability risk to the entire plan because of one member’s failure to comply with the MEP rules has been a major roadblock to MEPs. This has been addressed in the SECURE Act and now only the employer-participant in violation of the rules would be responsible for those violations.
The SECURE Act has not moved forward in the Senate; however, supporters are hopeful for a ruling by year-end that would establish the structure for a true open MEP.
If you have questions about how this may affect your small business or whether an MEP makes sense for your business, contact a member of our Retirement Plan Advisory Team.
Proposal to Expand Access to Retirement Plans
Material discussed in this communication is meant to provide general information and should not be acted on without obtaining professional advice tailored to you or your company’s individual and specific needs. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used by any person or entity, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This information is for general guidance only and is not a substitute for professional advice.
The information contained herein should not be construed as personalized investment advice. Investment in securities involves the risk of loss, and past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this document will come to pass. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that your portfolio will match or outperform any particular benchmark.
Information presented was obtained from sources deemed qualified and reliable; however, MFA makes no representations as to accuracy, completeness, suitability, or validity of any information within this communication and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Any forward-looking statements are believed to be reasonable; however, MFA gives no assurance that such expectations will prove to be correct.