Section 101 of the SECURE Act Adds “PEP” to the Retirement Plan Industry

Much like a good cup of coffee in the morning gets me going out the door, ready for retirement plan audits, Congress added some “PEP” to the retirement plan industry. But will the “PEP” end up being decaffeinated? Only time will tell.

The SECURE Act

For good or bad, changes to the retirement plan industry have come. Congress has expanded retirement plan legislation, seemingly much for the better. The Further Consolidated Appropriations Act was enacted by Congress on December 20, 2019. As part of this Act, provisions affecting retirement plans were included in the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE). In these divided times, especially in the political climate, one thing that legislators can seem to agree on is the need for retirement enhancement. It’s a win-win for constituents and legislators alike – or so it seems. It’s positive because needed legislation can help ensure that employees are adequately prepared for retirement. Hopeful for success, one provision in the SECURE Act has created new options for employers in search of the ideal retirement plan.

Pooled Employer Plans (PEP)

Section 101 of the SECURE Act affects multiple employer plans (MEP) and creates a new pooled employer plan (PEP) which expands the tools in a plan sponsor’s toolbox of retirement plan options. Prior to the SECURE Act, multiple employer plans were allowed by legislation, but there were many limiting provisions that employers had to follow. So what is a MEP exactly? A multiple employer plan is a single plan that covers one or more unrelated employers that do not have to be part of the same controlled group or affiliated service group. Prior to the SECURE Act, only closed MEPs were allowed, meaning that even though member employers were unrelated, they had to have some commonality other than the retirement plan. For example, a trade organization of car dealers could join a closed MEP. In addition to the “common interest” rule, another limiting factor was legislation nicknamed the “one bad apple rule” which meant that if one employer in the MEP had an operational failure, the whole plan would be in jeopardy of losing its tax-qualified status. It is then understandable that an employer would be hesitant to join a MEP when the plan risks losing its tax-exempt status for reasons outside of its control. Lobbyists and trade organizations, among other interested parties, rightfully pushed for more leniency. Congress listened and created the PEP. A PEP is a multiple-employer plan, which is considered an “open” MEP because it is no longer required to follow the “common interest” rule. A PEP only needs to have a Pooled Plan Provider (PPP) as the named fiduciary of the plan. Additionally, the PEP must designate one or more trustees (other than employers in the PEP) to be responsible for collecting contributions and holding assets of the plan. It is not clear at this point what “being responsible for collecting contributions” entails since each employer has the ultimate authority to fund the contributions. But more on the PEP terms later. The SECURE Act finally offered relief from the “one bad apple” rule for PEPs. The SECURE Act indicates that only the“…employer (and not the plan with respect to which the failure occurred or any other employer in the plan) shall..be liable for any liabilities with respect to such plan attributable to employees of such employer…” So employers now have the PEP option in addition to the MEP option that was previously available. That naturally leads to the question: why would an employer, with or without a single employer plan, want to join a PEP?

Possible Advantages of a PEP

Two possible advantages of joining a PEP are lower costs and administrative simplicity. Administrative simplicity is possible since member employers can delegate many aspects of plan administration to the named Pooled Plan Provider (PPP). A PPP (defined in the SECURE Act) is a person who is designated by the terms of the plan as named fiduciary, as the plan administrator, and as the person responsible to perform all administrative duties. The PPP will usually be the service provider of the PEP. The other advantage of lower costs can come from standardization and economies of scale. Increased savings occur with more integration in operations with service providers, such as the payroll companies.

Additional Considerations

Economies of scale are not a guarantee. In certain cases, it seems that the amount of work will not be different than it would be if the employers existed independently. For example, discrimination testing and recordkeeping still need to be completed separately for each employer. With respect to reporting and disclosure, efficiencies were intended by requiring only one Form 5500 filing. Form 5500-SF will not be allowed, however.

Although one Form 5500 will be filed, additional schedules will be required for each employer. Since separate accounting must still be maintained for each member employer, filing one Form 5500 may not really involve less work, although auditors may be able to test employer contributions on a rotating basis, reducing some audit work and, as a result, audit costs.

Administration and Fiduciary Responsibility Can Never Be Fully Divested

As has always been the case with retirement plans, an employer can’t relieve itself of all fiduciary and administrative responsibility through the use of a PPP. The ultimate responsibility for the plan always lies with each member-employer.

Terms of the PEP

The terms of the PEP must:

1. Designate a PPP as named fiduciary of the plan;
2. Designate one or more trustees (other than the employer) to be responsible for collecting and holding assets of the plan – including implementing written contribution collection procedures;
3. Provide that each employer in the plan retains fiduciary responsibility for –
   1. The selection and monitoring of the PPP, and
   2. To the extent not otherwise delegated to another fiduciary, the investment and management of the portion of the plan’s assets attributable to employees of the employer.
4. Provide that employers in the plan, and participants and beneficiaries, are not subject to unreasonable restrictions, fees, or penalties with regards to ceasing participation, receipt of distributions, or transferring assets of the plan;
5. Require –
   1. The PPP provides employers in the plan any disclosure or other information required.
   2. Each employer in the plan to take actions necessary to properly administer the plan to meet applicable requirements, including necessary disclosures.
6. Provide any disclosure or information required under clause 5 to be provided in electronic form and to ensure only reasonable costs are imposed on the PPP.

Audit Considerations

It’s understandable that many custodians, recordkeepers, and others are eager to get a PEP started so that there is a plan available when an employer asks about the new PEP option. I’ve received many questions regarding the audit requirement and how audit costs will correlate with PEPs. To begin, PEPs with 100 or more participants are required to have an annual financial statement audit, which must be attached to the Form 5500. An audit, although beneficial, comes at a cost, which may be allocated to each employer. If a PEP has several employers, that cost can be spread so it’s not as large of an impact to each employer. However, if the plan of a member-employer would be considered a small plan as a single employer plan and, as such, would not be required to have an audit, then that employer may be forced into paying for a portion of an audit that would not have needed outside of the PEP. Each individual employer will have to weigh the options given its own circumstances. However, there are considerations for the PEP that will help ensure audit costs are as low as possible.

1. Limited options – Audit costs are like a new car: the more options selected, the more costly the car will become. The higher the flexibility, variety of permitted payroll companies and the degree of integration, and the complexity of available plan provisions available through the PEP, the higher the audit costs will be.
2. Payroll – It may be beneficial to limit the number of permitted payroll providers. More hands in the kitchen may lead to more errors, or at least, more complexity. To keep administrative and audit costs at a minimum, a PEP could allow only one payroll provider and require 360 integration for all employers. In theory, a single, fully integrated payroll provider would maximize economies of scale, but in reality, each employer may want to keep its own payroll provider. Both options have advantages and disadvantages, but at least for audit purposes, the more options allowed the more audit work will be created.
3. SOC Reports – It is important to ensure that the PPP has service providers that have Service Organization Control reports. The SOC report streamlines the auditors’ understanding of the processes at service providers and possibly grants auditors the opportunity to rely on the SOC report to reduce, but never eliminate, audit testing. If there are no SOC reports, the auditor will have to perform more procedures to understand processes and ensure that controls at the service providers are properly designed and operating accurately.
4. Implementation Guidance – The DOL will provide implementation guidance it determines necessary. Until guidance is issued, it may be beneficial to wait. However, with providers jumping into the PEP pool already, waiting may be tantamount to missing the boat.

The above-noted criteria are most likely not the only areas relevant for those considering offering or joining PEPs. I’m sure there will be many more that will come up as we continue to learn more about the setup and administration of PEPs. Will this infusion of caffeine by Congress to the retirement plan industry add more vigor and opportunity in the retirement plan industry? I believe it will. Whether the PEP model will significantly expand retirement plan access for employees is yet to be seen. The removal of restrictions and barriers that affected the MEP model should benefit the retirement industry. I’m not losing sleep over what’s to come. I eagerly await and will read the new implementation guidance over a good cup of coffee.

Past PEP Blogs

• What are the Reporting Requirements for a Pooled Employer Plan? (Posted 11.14.2023)
• Pooled Employer Plans (PEPs): The Basics (Posted 10.31.2023)
• When it Comes to Joining a PEP, Don’t be the Hot Potato (Posted 10.17.2023)