What Is a Multiple Employer Plan (MEP)?
A multiple employer plan (MEP) is a retirement savings plan adopted by two or more employers that are unrelated for income tax purposes, as defined by the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL). A MEP can be either a defined-benefit pension plan or a defined-contribution retirement plan such as a 401(k).
MEPs are organized and run by an entity known as the “MEP sponsor.” The MEP sponsor is responsible for administrative duties and, in most cases, fiduciary liability for the plan. Companies that join a MEP are known as “adopting employers.”
- A MEP is a retirement savings plan adopted by two or more unrelated employers, as defined by the DOL and IRS.
- Administrative and fiduciary responsibilities of a MEP are performed by the “MEP sponsor,” which can be an employer-member, appointed board, trade group or association, or a third party.
- DOL and IRS policy mandates that single plan MEP structure must be “closed,” and employer members must have a nexus or common interest in addition to participation in the retirement savings plan.
- A recently passed DOL rule relaxes the closed structure requirement to allow wider participation in MEPs by small companies and individual working owners with a geographical or industry connection.
- By DOL and IRS policy, an “open” MEP that any business can join regardless of connection must provide a separate plan for each member business. Pending legislation would permit a single plan for open MEPs.
Understanding a Multiple Employer Plan (MEP)
The concept of multiple employer plans dates to the early 20th century and was formalized by the Labor Relations Act of 1947 (better known as the Taft-Hartley Act), when the name was changed to multiemployer plans. This was done to distinguish collective bargaining plans negotiated between multiple employers in the same trade or industry and a labor union (multiemployer plans) from plans formed by unrelated multiple employers (multiple employer plans).
Final regulations under section 413 of the Internal Revenue Code (IRC) were published Nov. 9, 1979, that apply to both multiple employer plans (413c) and multiemployer plans (413b). Additional guidance from the DOL in 2012 further defined how so-called “open” MEPs work. (For more, see “Types of Multiple Employer Plans” below.)
Multiple employer plans allow small companies that might not be able to offer a retirement savings plan due to cost, complexity, and liability to do so by providing economies of scale, reduction of reporting and other paperwork requirements, and, in most cases, minimizing fiduciary responsibility.
Multiple employer plans and mutliemployer plans are not the same thing.
Types of Multiple Employer Plans
Currently two types of MEPs exist, closed and open. As of Sept. 30, 2019, a third type, “association retirement plan,” will take effect. Pending legislation, should it pass Congress, would change the nature of open MEPs.
A closed MEP is made up of more than one unrelated employer (with employees) and a sponsor that is a bona fide group, association, or organization with which member employers share a nexus or interest other than the retirement savings plan. Only member employers of the bona fide group can participate in the plan, and member employers must also be able to make plan-related decisions.
A relaxed form of closed MEP, an association retirement plan (ARP) allows unrelated employers, as well as self-employed working owners, in different industries but with a physical presence in the same metropolitan area, region, or state, to join the same single-plan MEP. The rule also allows companies in the same industry, even if they don’t share a geographical connection, to join the same MEP.
As defined by the DOL in 2012, an open MEP, in which members have no connection other than participation in a retirement savings plan, requires each member to have and report on its own individual company plan. Pending legislation known as the SECURE Act would permit open MEPs in which there would be a single retirement plan for all members.
Sponsorship of a Multiple Employer Plan
The sponsor of a MEP can be any one of several entities:
- Lead Employer. In this case a single adopting employer sponsors the plan and appoints the fiduciaries. This structure may run afoul of the DOL requirement that adopting members control the plan.
- Board of Directors. It is appointed by the adopting employers to serve as plan sponsor and/or to appoint and monitor fiduciaries.
- Cosponsorship. Under this scenario each adopting employer is a cosponsor of the plan. This structure is sometimes combined with the board of directors structure to ensure that adopting employers control the plan.
- Trade or Industry Group or Association. Each of these can be considered an employer for ERISA purposes and therefore eligible to sponsor the MEP. The new DOL rule allows local organizations, such as a chamber of commerce, to also be a sponsor.
- Third Party. In this case a professional employer organization (PEO) or similar professional provider performs management tasks, such as payroll, workers’ compensation, and training. The new DOL rule cited above helps eliminate difficulties with PEOs failing to meet the DOL requirement that adopting employers control the plan.
Multiple Employer Plan vs. Multiemployer Plan
A multiple employer plan is maintained by two or more unrelated employers under the sponsorship of an entity in which these employers share a common nexus in addition to the retirement savings plan in the MEP. All this must be done in compliance with Internal Revenue Code (IRC) 413(c)
A multiemployer plan is a collectively bargained plan between more than one employer, typically within the same or related industries, and a labor union. Multiemployer plans are often called Taft-Hartley plans and must comply with IRC 414(f).