SECURE Act Increases Access to Retirement Plans with 'Pooled Employer Plans'

For more than seven years now, policymakers and taxpayers have clamored for Congress to change the law to permit “open” multiple employer plans (MEPs) – that is, retirement plans that are adopted by multiple unrelated employers (including employers with no nexus or common association) and may be sponsored and administered by an employer plan sponsor or by an unrelated firm. While recent regulatory changes (discussed in our recent publication, Multiple Changes for Multiple Employer Plans) broadened the community of employers that can be served by and offer MEPs that can be treated as single plans under current rules, these changes still did not permit truly “open” MEPs. Now, the SECURE Act (the Setting Every Community Up for Retirement Enhancement Act of 2019), which was signed into law on December 20, 2019, as part of the Further Consolidated Appropriations Act, 2020 (HR 1865, Public Law No. 116-94), helps to fill that gap by authorizing a new form of open MEP called a “pooled employer plan” or “PEP.” 

What is a pooled employer plan?

A PEP is (1) an individual account plan (2) established or maintained by a “Pooled Plan Provider” (defined below) for the purposes of providing benefits to the employees of two or more employers, which (3) is a plan described in Section 401(a) of the Internal Revenue Code of 1986, as amended (the Code) or which consists of individual retirement accounts under Code Section 408, and (4) includes certain specified terms in its plan document. These requirements are discussed in more detail below.

Notably absent from the PEP definition are Code Section 403(b) plans,[1] 457(b) governmental plans, multiemployer plans,[2] and defined benefit plans.

Who can be a pooled plan provider?

Under the SECURE Act, the following requirements apply for an entity to qualify as a pooled plan provider (PPP):

1. The entity is designated by the terms of the PEP plan document as the named fiduciary, the plan administrator, and the person responsible for performing all administrative duties (including applicable coverage and nondiscrimination testing) reasonably necessary to ensure that (a) the plan satisfies the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the Code, and (b) each employer participating in the plan takes such actions as the US Department of the Treasury (Treasury), the US Department of Labor (the DOL), or the PPP determines are necessary for the plan to satisfy the applicable provisions of ERISA and the Code;
2. Before beginning operations as a PPP, the entity registers with Treasury and the DOL and provides such information as Treasury and the DOL may require;
3. The entity acknowledges in writing that it is the PEP’s named fiduciary and plan administrator; and
4. The entity is responsible for ensuring that all persons who handle plan assets, or are otherwise plan fiduciaries, are bonded in accordance with ERISA Section 412.

Entities that are in a controlled group with the PPP and that perform services for the PEP are treated as the PPP for certain purposes under the SECURE Act. In addition, the PPP must also subject itself to audit, examination, and/or investigation by Treasury and the DOL.

Importantly, despite these various compliance obligations and requirements, a PPP does not need to be in a controlled group or affiliated with participating employers. This opens the door for retirement services firms of different types (such as insurance companies, banks, trust companies, consulting firms, record keepers, third-party administrators and associations, among others) to provide PEPs to their clients.

What employers can participate in a pooled employer plan?

Broadly speaking, there are no restrictions on the employers that can participate in a PEP. Previously, employers participating in traditional MEPs were required to satisfy a commonality or “nexus” requirement (for example, unrelated employers were required to be engaged in a common industry or located in geographic proximity). Notably, unrelated employers can now participate in a PEP without satisfying any commonality or nexus requirement.

Employers may weigh the benefits of a MEP against the benefits of maintaining their own individualized retirement plans. For example, larger employers may already have the benefit of economies of scale and may appreciate the opportunity to offer unique features, such as company stock, custom investment options, and open architecture platforms. In addition, investment providers widely offer investment pooling and commingling solutions, and fiduciary outsourcing solutions are also widely offered to help mitigate fiduciary obligations.

What happens if an employer fails to meet its obligations to a pooled employer plan?

Traditional MEPs have been subject to what is referred to as the “one bad apple” rule – the risk that if one participating employer fails to meet its obligations with respect to its portion of the MEP, the tax qualified status of the entire MEP, even for unrelated participating employers, could be jeopardized as well. Treasury recently proposed a regulation to alleviate this risk, but the regulation has not been finalized.

Taking an approach similar to the proposed Treasury regulation (which actually came out after the SECURE Act had been introduced), the SECURE Act mitigates this risk for PEPs. Under the new law, if certain requirements are met, a PEP will not be treated as failing to meet the PEP requirements solely because a participating employer fails to meet its obligations to the PEP. In particular, the PEP’s terms must provide that in the event of such a failure, assets attributable to that employer are transferred out of the PEP to another retirement plan or account, which may be (1) a single-employer plan sponsored by that employer, (2) IRAs or other eligible individual retirement plans of the affected employees, or (3) any other arrangement determined appropriate by Treasury and/or the DOL, unless Treasury and/or the DOL determines that it is in the “best interests” of the employees to retain the assets in the PEP. In addition, the offending employer, and not the PEP or other participating employers, will be responsible for any associated liabilities resulting from the failure.

This rule raises additional questions on which we would expect further regulatory guidance. For example, the PPP could have fiduciary obligations for the transfer of assets to the single-employer plan or to eligible individual retirement accounts. Absent further DOL guidance on the applicability of these rules to PEPs, the PPP may wish to comply with the safe harbors for automatic rollovers to individual retirement plans or distributions from terminated individual account plans under DOL regulations and the related prohibited transaction class exemption.

What language must be included in a pooled employer plan’s plan document?

A PEP plan document must

1. designate a PPP and provide that the PPP is a named fiduciary of the plan;
2. designate one or more trustees to be responsible for collecting contributions to, and holding the assets of, the plan and, further, require that the trustee(s) implement written contribution collection procedures that are reasonable, diligent, and systematic;
3. provide that each employer in the plan retains fiduciary responsibility for (a) the selection and monitoring of the PPP and any other person designated as a named fiduciary of the plan, and (b) the investment and management of the portion of the plan’s assets attributable to its employee participants (and their beneficiaries), unless those responsibilities have been delegated to another fiduciary by the PPP;
4. provide that employers in the plan, and participants and beneficiaries, are not subject to unreasonable restrictions, fees, or penalties with regard to ceasing participation, receipt of distributions, or otherwise transferring assets from the plan;
5. provide that the PPP is required to provide to participating employers any disclosures or other information Treasury and/or the DOL may require;
6. provide that each participating employer is required to take such actions as Treasury, the DOL, or the PPP determines are necessary to administer the plan or for the plan to meet any requirement under the SECURE Act or any applicable requirement of the Code or ERISA; and
7. provide that any disclosure or other information required to be provided by the PPP may be provided electronically and will be designed to ensure only reasonable costs are imposed on the plan’s PPP and employers.

What are the reporting requirements for pooled employer plans?

Whereas an open MEP that does not qualify as a traditional MEP under current DOL rules would be required to file a Form 5500 for each participating plan, a PEP may file a single Form 5500 annual report for the entire plan.

Generally, PEPs must include in their Form 5500 annual reports (1) a list of participating employers and a good faith estimate of the percentage of total contributions made by each such employer during the plan year and the aggregate account balances attributable to each participating employer, and (2) identifying information for the entity designated as the PPP.

The SECURE Act provides that the DOL may by regulation permit PEPs that cover fewer than 1,000 participants to file a simplified Form 5500; provided, however, that no more than 100 participants are attributable to any single participating employer. Until such regulations or similar rules are issued, presumably all PEPs will be required to file full Forms 5500 as described above.

Will there be additional guidance?

The SECURE Act directs both Treasury and the DOL to issue guidance regarding certain PEP-related provisions of the new law. Further, the SECURE Act directs Treasury to issue model language for PEP plan documents. Until such guidance is issued, employers and PPPs will not be treated as violating the applicable provisions of the law provided that their actions are based on a good faith, reasonable interpretation of such provisions.

Practically speaking, how will pooled employer plans start to be made available?

In operation, we anticipate that a number of providers that are already heavily involved in the defined contribution retirement plan marketplace will register as PPPs and start making PEPs available to prospective participating employers. Simultaneous with this registration process, the PPPs will prepare PEP plan documents and otherwise establish the investment and administrative framework necessary to sponsor the PEP. This startup process likely will take some time and may be facilitated (or impeded) to some degree by guidance issued by the DOL or Treasury. However, given the potential market for PEPs (for example, many small and mid-sized employers that do not currently sponsor retirement plans or that are frustrated by the burdens and complexity of administering plans), we anticipate that many providers will establish PEP product offerings and appoint and retain administrators, investment advisors and investment managers for their respective PEPs.

Observations – What are the compliance issues that pooled plan providers and participating employers should consider?

While PEP compliance risks will become more evident over time, there are certain compliance issues for PPPs and prospective participating employers to consider at the outset. For example:

• One of the primary objectives of PEPs is to close the retirement savings “gap” and make retirement plans more available to small employers. Ideally, PEPs can ease the burdens and costs of sponsoring a retirement plan. Under the PEP rules, administrative and fiduciary responsibilities largely can be transferred to the PPP. However, the rules also make clear that participating employers will retain certain residual fiduciary responsibilities, including for the selection and oversight of the PPP and the plan’s designated named fiduciaries. The implementation of the PEP rules and the terms of any interpretive guidance will be critical in defining the scope of the fiduciary responsibility retained by a participating employer.
• PEPs, like traditional MEPs, are required to disclose with their Form 5500 filings a list of participating employers and a good faith estimate of the percentage of total contributions and aggregate account balances attributable to each such participating employer. In practice, traditional MEPs, in particular those sponsored by professional employer organizations (PEOs), appear to have had difficulty complying with this requirement and this has resulted in a corresponding DOL enforcement initiative. Specifically, as explained in FAB 2019-01, the DOL targeted compliance with this requirement and, for the 2016 plan year, identified 101 MEPs with noncompliant Forms 5500 (representing approximately 480,000 participants). PEPs should be careful to avoid similar problems.
• The timing of the remittance of elective deferrals from the participating employers to the plan must comply with ERISA. Timely remittance of elective deferrals is a long-standing DOL enforcement initiative for plans of all types and there could be particular logistical challenges for PEPs. The DOL interprets ERISA to require that an employer deposit elective deferrals into the plan’s trust as soon as possible following segregation of the moneys from the employer’s general assets, but in no event later than the 15th business day of the following month. Importantly, the DOL does not interpret the 15th business day of the following month rule as a safe harbor and routinely holds plans and employers to shorter periods that it views as administratively practical. For example, in the DOL’s view, employers that routinely deduct and remit amounts for tax withholding and other requirements within a few days should be able to do the same for elective deferrals. This timing issue may thus become a point of focus for PPPs, as the DOL’s penalties and assessments for violating these requirements can be significant and the logistics of having multiple employers deposit elective deferrals as soon as possible following segregation are challenging.
• While the SECURE Act permits good faith interpretations of the PEP rules pending issuance of Treasury and DOL regulations, the requirements that ultimately apply to PPPs and PEPs will depend on the exact content of these regulations and other guidance. As such, providers considering offering PEPs may want to take a measured approach to implementation pending issuance of these regulations and further guidance.
• PPPs and employers alike will want to carefully consider design features to better support improved participant outcomes, financial wellness, cost savings, and their overall retirement plan and benefits strategies. Plan terms can also be carefully designed to provide delegations of fiduciary responsibility and risk management.
• Employers will also want to review both the opportunities presented by PEPs and the continued benefits presented by maintaining individualized plans, including the ability to control and customize plan features and provide for unique benefits offerings.

While PEPs may confront legal and logistical hurdles along the way, they potentially represent an attractive opportunity for both participating employers and PPPs. Participating employers, including small employers that have never before sponsored a retirement plan, may wish to take advantage of significant economies of scale, lower costs, and streamlined administration available through PEPs that traditionally have been available only to large-sized employers and plans. As such, aspiring PPPs may find a significant untapped marketplace.

The SECURE Act’s revisions to the Code and ERISA described above are effective December 31, 2020. However, the legal requirements and administrative steps to establish a PEP are complex and potentially time consuming. Thus, aspiring PPPs should dive right in to begin analyzing whether sponsoring a PEP makes sense for them.