PEPs were established in section 101 of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which amended ERISA and the IRC, to allow unrelated employers to join a defined contribution retirement plan maintained by a pooled plan provider (PPP) acting as the plan’s administrator and named fiduciary. A PEP, as defined in Section 101, is an individual account plan established or maintained for the purpose of providing benefits to the employees of two or more unrelated employers as a qualified retirement plan or a plan funded entirely with individual retirement accounts (IRA plan).
A PEP is a type of multiple employer plan (MEP) that allows unrelated employers to participate in a single, shared defined contribution plan, which is treated as a single plan for purposes of satisfying Employee Retirement Income Security Act of 1974 (ERISA) requirements. A PEP is considered to be an “open MEP” because there are no requirements that participating employers be in the same industry or location, nor are there limits to the number of participating employers in a PEP. On the other hand, in a “closed MEP,” the employers must share common interests and/or organizational relationships beyond the provision of benefits. Employers have been able to join PEPs since 2021.
Pooled Plan Providers
A PEP is required to have a pooled plan provider (PPP) that is designated by the terms of the plan as a named fiduciary and plan administrator. The PPP performs certain administrative duties, including conducting proper compliance testing with respect to the PEP and the employees of each employer in the PEP. It is expected that most PPPs will be organizations such as insurance companies, banks, trust companies, consulting firms, record keepers, and third-party administrators. The PPP must register with the Department of Labor. A PEP must designate one or more trustees to be responsible for collecting contributions to, and holding the assets of, the plan and require such trustees to implement written contribution collection procedures that are reasonable, diligent, and systematic. The PPP is responsible for ensuring that all persons who handle assets of, or who are fiduciaries of, the PEP are bonded.
Together but Separate
Joining a PEP does not completely exonerate each employer from its fiduciary responsibilities. Each participating employer in a PEP generally selects from a range of plan provisions, as specified in the PEP plan document and is ultimately responsible for following the selected provisions. Except with respect to certain administrative duties of the PPP, each participating employer in a PEP is legally treated as a plan sponsor with respect to the portion of the plan attributable to employees of such employer (or beneficiaries of such employees) and retains fiduciary responsibility for the selection and ongoing monitoring of the PPP and any investment and management of the portion of the plan’s assets attributable to the employees of the employer to the extent not delegated to another fiduciary by the PPP.
How is a PEP different from other multiple employer plans (MEPs) and multiemployer plans?
MEPs are maintained by two or more employers for the purpose of pooling investments and sharing administrative costs. MEPs typically maintain separate accounts for each of the employers within the plan, but they are treated as a single plan under the Internal Revenue Code (IRC). However, a MEP may or may not be treated as one plan under ERISA. The DOL has imposed a “common interest” requirement on employers adopting MEPs that must be met if the MEP is to be treated as one plan for ERISA purposes. However, with enactment of the SECURE Act, Congress loosened the common interest requirement for PEPS. Unlike the “closed” MEP, a PEP is effectively an open MEP because it is not subject to the common interest requirement that applies to other MEPs. As such, PEPs are considered a single plan for both IRS and ERISA purposes. Multiemployer plans are similar to MEPs in that both types of plans are single plans that cover participants of more than one employer; however, multiemployer plans are subject to the terms of a collective bargaining agreement (CBA) between two or more contributing employers (or a group association of employers) and a labor union.
Discarding the Bad Apple
In the past, the “one bad apple” rule jeopardized a plan’s tax qualified status when one employer had an operational failure. When things go wrong, PEP members are not jointly and severally liable for each other’s actions. Under Section 101 of the SECURE Act, a PEP is not treated as failing the IRS qualification requirements solely because a single employer fails to satisfy those requirements, as long as the PEP provides for the transfer of the offending employer’s plan assets to one of various specified arrangements. Noncompliant PEP members are a bad apple turned a hot potato; the PEP has to get rid of it before everybody gets burned. When it comes to PEPs, “All for one and one for all” only applies until something goes wrong.
