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Multiple Employer Plan (MEP)

  • 3763. What are the basic qualification requirements for forming a multiple employer plan (MEP) under the final DOL regulations?

    • The DOL released final rules governing MEPs on July 31, 2019, which became effective as of September 30, 2019. In general, to quality as a multiple employer plan (MEP) under the final regulations, a plan must satisfy five basic requirements:[1]

      (1) Under the DOL guidance, the association must have at least one substantial business purpose that is not related to offering the plan.

      (2) The employer-members of the association must control the MEP’s activities and any employers that participate in the MEP must control the MEP both in substance and in form, whether directly or indirectly.

      (3) The association must adopt a formal organizational structure, which includes bylaws, a governing body and other organizational aspects where relevant.

      (4) Only employees of the association’s employer-members and certain working owners may participate in the MEP.

      (5) Under the DOL rules, some “commonality” of interest must exist between the employers participating in the MEP, such as the same industry or geographic location—a substantial expansion over prior rules, which required a more concrete nexus between participating MEP employers.

      This means that participating employers can be located in the same city, county, state or even multi-state region. Companies operating in the same industry can join together even if they operate in entirely different regions.[2] Financial services firms, however, cannot qualify under the expanded MEP regulations.

      Of course, one of the intended primary objectives of a MEP is to achieve lower costs of administration for the participating employers, and by extension, their participating employees. Failure to do so may carry risks for a MEP and its administrator. In September 2020, a lawsuit was filed against the MEP administrator by several plan participants of one participating employer alleging excessive fees by the administrator.[3] If the allegations should prove to be true, it will be interesting to see if a MEP and its administrators will be held to a higher standard of performance than single employer plans as to plan administration costs.

      For plan years beginning after December 31, 2019, the SECURE Act eliminated the “one bad apple” “unified plan” rule, which could result in the entire plan being disqualified because of the bad actions of a single employer in the MEP.[4] The Act also directs the IRS and DOL for provided for a consolidated, simplified Form 5500 for similar plans. Plans must be defined contribution plans, has the same trustee, the same named fiduciary (or fiduciaries) under ERISA, the same administrator, use the same plan year, and provide the same set of investment or investment options.[5] The SECURE Act went even further in eliminating the common nexus rule all-together for certain MEPs, and created another category of MEP, referred to as a to as “pooled employer plans” (“PEP”).


      [1].     See DOL Reg. 2510.3-55(b)(1).

      [2].     DOL Reg. 2510.3-55(b)(2).

      [3]   See Khan v. Directors of the Pentegra Defined Contribution Plan, No, 7:20-cv-07651 (SDNY 9-15-2020).

      [4]   PL 116-94, Sec. 101

      [5]   PL 116-94, Sec. 202


  • 3764. What is a “Pooled Employer Plan” (PEP)?

    • Under the SECURE Act, even unrelated employers that do not operate in the same industry or in the same geographical location (or otherwise) can, beginning after December 31, 2019, join together in what may be best described as an “open MEP”. This means that the PEP is really a MET meeting MEP requirements. Except, a PEP requires no concrete nexus of industry or geography, or other “commonality” involving participating employers in the PEP. About all that PEP employers need to have in common is a “Pooled Employer Provider” (PPP). For ERISA purposes, a PEP is treated as single plan, which allows for the filing of a single 5500. The PEP filing does require:

      • a list of the participating employees;
      • a good faith estimate of the contribution percentages and account balances tied to each employer; and
      • identifying information.

      Importantly, a PEP also only requires a single ERISA bond equal to 10 percent of the funds handled, but not to exceed $1,000,000.

      The PEP must be administered by a pooled plan provider (PPP), which is likely to be a financial services firm.[1] The PPP must be responsible for all administrative duties and be named by the plan as the named fiduciary and as the ERISA Section 3(16) plan administrator. It must also register with the Treasury Secretary and DOL as such.[2] It must also make certain all parties who will handle plan assets are properly bonded.

      Use of the pooled plan provider to act as both plan administrator and a fiduciary with respect to the plan is intended to ease both the administrative burden and fear of fiduciary liability for small business owners. However, each employer, participating in a plan with a PPP, will be treated as plan sponsor with respect to the portion of the plan attributable to employees and beneficiaries of that employer.[3]

      The SECURE Act rules that apply to PEPs are effective for plan years beginning after December 31, 2020.[4] The SECURE Act directs the Treasury to issue additional guidance on many of these issues (including model plan language). However, before this guidance is released, the law provides that employers and pooled plan providers will not be treated as failing to meet a requirement if they make a good faith, reasonable effort in interpreting the new provisions.

      Other than the unique PEP requirements listed above, PEPS must generally follow the same requirements as MEPs. Differences, to the extent there may be any, will be noted in the Questions discussing MEPs that follow.

      Planning Point: Under the SECURE Act, MEP availability would be expanded even further to permit “open MEPs,” referred to as PEPs, which are MEPs formed by employers with no commonality of interest other than offering the retirement benefits under the plan. PEP providers are likely to be financial service institutions. PEPs will enjoy the advantage of being treated as a single plan; hence allowing for the filing of a single 5500 and maintenance of a single ERISA bond, in addition to other efficiencies.


      [1].     IRC Sec. 413(e)

      [2].     IRC Sec. 413(e)(3).

      [3].     IRC Sec. 413(e)(3)(D).

      [4].     MEPs established prior to December 20, 2019 must affirmatively elect to be a PEP.

  • 3765. What is a multiple employer plan (MEP)? Why might the MEP structure be attractive to small and mid-sized business owners?

    • A multiple employer plan (MEP), also known as an association retirement plan, is essentially a defined contribution plan that is open to employees of multiple employers.

      The DOL expanded the rules to allow more employers to participate in MEPs, which is especially valuable for small business owners who can now join with other entities to share in the costs and administrative burdens of providing a qualified retirement plan option for employees. The MEP structure can also encourage small business owners to offer a retirement savings option by limiting the fiduciary liability that can attach to the employer itself. While these benefits can be significant, see Q 3769 for a discussion of the “one bad apple rule” that small business owners should understand before adopting the MEP.

      Under previous law, the MEP structure was limited to small business owners with a strong connection, such as a common industry.

      Importantly, the SECURE Act also simplifies filing requirements for certain related defined contribution plans and individual account plans[1] by allowing them to file a single Form 5500.  This further simplifies some of the administrative burdens and costs associated with providing a retirement savings option through MEPs.

      Planning Point: Pooled employer plans (PEPs) are required to report their aggregate account balances for every employer-participant starting with the 2021 plan year and must also report certain information about the plan provider on Form 5500.  MEPs are also now subject to new reporting requirements, which they will file in an attachment to Form 5500 starting with the 2021 plan year.  The MEP must report year-end account balances for each employer-participant, but the DOL has clarified that this requirement does not apply to MEPs that function as defined benefit plans.  The revised Form 5500, released in early 2022, provides information on these reporting requirements, and is also updated for post-SECURE Act retirement plans that were adopted retroactively.

      To be eligible for consolidated filing, the plans must share:

      • The same trustee,
      • One or more of the same named fiduciaries,
      • The same administrator,
      • Plan years beginning on the same date, and
      • The same investments or investment options for participants and beneficiaries.[2]

      [1] As defined under IRC Sec. 414(i) or ERISA Section 3(34).

      [2] PL 116-94 (SECURE Act), Sec. 202.

  • 3766. Can working owners with no employees participate in MEPs?

    • Sole proprietors and other self-employed workers are entitled to participate in the MEP as both employer and employee.[1] To qualify, the owner must have an ownership right in a trade or business (partners in partnerships also qualify). The owner must earn wages or self-employment income from the trade or business by providing personal services to the business. Additionally, the working owner must meet one of two additional criteria:

      1. the owner must work at least an average of twenty hours per week or at least eighty hours per month in the business; or
      2. in the case of an MEP offered via a bona fide group or association of employers (i.e., not a PEO, see Q 3767), the owner must have wages or self-employment income from the business that at least covers the working owner’s cost of coverage for participation by the working owner (and any covered beneficiaries) in any group health plan sponsored by the association in which the individual participates.[2]

      For purposes of determining the working owner’s eligibility to participate in the MEP, the relevant date is when the individual first becomes eligible to participate, but verification of continuing eligibility must also be made over time. The DOL rule specifies only that reasonable monitoring procedures must be developed to ensure continued eligibility.[3]


      [1].  DOL Reg. 2510.3-55(d)(1).

      [2]. DOL Reg. 2510.3-55(d)(2)(iii).

      [3]. DOL Reg. 2510.3-55(d)(3).

  • 3767. Can a professional employer organization (PEO) offer the MEP option? Are there any safe harbors for PEOs that choose to offer MEPs?

    • Professional employer organizations (PEOs) are permitted to offer MEPs under the final DOL regulations—effectively acting as the employer and “plan sponsor” under a contractual arrangement with the actual employer-members of the MEP.[1] The regulations also provided a safe harbor under which PEOs can offer MEPs by satisfying four criteria. To qualify, the PEO must:

      • assume responsibility for and pay wages to employees of the clients (employers) who join the MEP without regard to the receipt of payment from those clients (or the adequacy of any payments that are received);
      • assume responsibility for paying and performing reporting and withholding for all federal employment taxes for clients who adopt the MEP without regard to the receipt of payment from those clients (or the adequacy of any payments that are received);
      • play a definite and contractually specified role in recruiting, hiring and firing employees of the client adopting the MEP (in addition to the employer’s similar responsibilities); and
      • assume responsibility for and have substantial control over the functions and activities of any employee benefits that the contract with the client (employer) requires the PEO to provide without regard to the receipt of payment from those clients (or the adequacy of any payments that are received) with respect to the benefits.[2]


      [1]. DOL Reg. 2510.3-55(c)(1).

      [2]. DOL Reg. 2510.3-55(c)(2).

  • 3768. If employers use a PEO to provide the MEP option, do the participating employers have any fiduciary responsibilities with respect to the plan?

    • According to the preamble to the final regulations, participating employers retain some degree of fiduciary responsibility even if they use a PEO to administer the MEP. Although the guidance is not extensive, the preamble provides that the employer would be responsible for acting prudently in monitoring and selecting the relevant service provider. The employer would also be responsible for ensuring that employee contributions to the MEP are transferred in a timely manner.

  • 3769. What is the 'one bad apple rule' and why do business owners interested in the MEP structure need to be aware of it?

    • Prior to 2019, under the “one bad apple rule,” (or “unified plan rule”) the entire MEP could be disqualified based upon the actions of only one employer that participated in the plan—based upon the assumption that the MEP is to be treated a single unified plan.

      In 2019, the IRS and Treasury proposed rules that would mitigate the potential impact of the rule.1 The SECURE Act finalized those rules by eliminating the one bad apple rule in certain situations.2

      The SECURE Act essentially provides that if one employer’s actions would disqualify the plan, only that employer’s portion of the MEP will be disqualified.  Under the new rules, in the case of one participating employer’s failure to act in accordance with the qualification rules:

      (1) the assets of the plan attributable to employees of the employer will be transferred to a plan maintained only by that employer (or successor), to an eligible retirement plan under Section 402(c)(8)(B) for each person whose account is transferred (unless the Treasury determines that it is in the best interests of the participant for the assets to remain in the plan), and

      (2) the employer (and not the plan in which the failure occurred) will be held liable for any liabilities with respect to such plan attributable to the employees of the employer.3

      Under the IRS proposal, to continue as a qualified MEP after a single member-employer has taken action that would otherwise disqualify the entire plan, the plan must have established practices and procedures in place that are designed to ensure compliance with the qualification rules by all MEP participants.

      In 2022, the IRS released proposed guidance on the SECURE Act’s elimination of the one bad apple rule will mirror the previous 2019 IRS proposal. Essentially, under these new rules, the MEP would continue as a qualified plan so long as the qualification failure is isolated to a single employer, rather than a reflection of a widespread issue across the employers participating in the MEP. The plan administrator must have a process in place that will provide notice to the employer responsible for the failure, and such notice, as proposed, would include a description of the failure, actions necessary to remedy the failure, and notice that the relevant employer has only 60 days from the notice date to take remedial action.

      The proposed rules provide that the plan may be required to provide up to three notices to a participating employer that does not respond to the initial notice.  The final notice must be provided to the DOL and all impacted participants.  The non-qualifying employer has two options upon receipt of a notice: (1) take remedial action or (2) initiate a spinoff within 60 days of the final notice.  If the employer does neither, the MEP administrator must stop accepting contributions from the non-compliant employer and participants.  The MEP must also provide notice to the impacted participants and give them an election with respect to the treatment of their accounts.  Participants could elect to remain in the plan or transfer their funds to another retirement plan.  The IRS notes that it intends to publish guidance that contains model language for MEP plan administrators.

      In addition, the plan must provide a description of the consequences if the noncompliant employer fails to take the remedial action necessary and notice of the plan’s right to spin off the non-compliant employer’s portion of the plan and assets.


      1. See REG-121508-18, proposed July 3, 2019.

      2. IRC Sec. 413(e)(1), added by the SECURE Act, Sec 101.

      3. IRC Sec. 413(e)(2), added by the SECURE Act, Sec. 101.

  • 3770. What do employers evaluating the MEP options have to know about various plan options after passage of the SECURE Act?

    • Beginning in 2021, under the SECURE Act, employers will be able to offer MEPs, association retirement plans (ARPs) and pooled employer plans (PEPs).  Clients should know the difference between the type of MEP available pre-2019, the MEP structure created by the 2019 DOL regulations and the different MEP rules that apply beginning in 2021 under the SECURE Act.  Technically, these are all different types of plans with different requirements that must be evaluated.  The DOL-created plans have been called “association retirement plans” (ARPs) to differentiate from the original “closed” MEP, and to clarify that ARPs must satisfy additional criteria in order to be treated as qualified plans. Under the SECURE Act, MEPs are also called pooled employer plans (PEPs)—another name for a type of MEP that meets certain additional requirements to avoid the commonality of interest requirement and one bad apple rule.

      Pre-2019, to participate in MEPs, all participating employers were required to share some strong type of common interest separate and apart from the retirement plan itself.  The need to share some type of affiliation or participate in the same industry sharply limited the availability of the “original” MEP—also called a “closed” MEP.

      The basic premise behind the idea of MEPs has remained the same—multiple small businesses join together to reduce the administrative burden and potential fiduciary responsibilities of offering a 401(k)-type retirement plan.  The DOL 2019 regulations expand MEP availability if certain criteria are satisfied.  Some in the industry began referring to these new MEPs as association retirement plans (ARPs) to differentiate from the original “closed” MEP, and to clarify that ARPs must satisfy additional criteria in order to be treated as qualified plans.  Essentially, the ARP is a type of MEP, and the terms have mostly been used interchangeably.

      Under the ARP structure, employers that share only the same geographic location or industry are permitted to join together in the MEP-ARP.  The participating employers can be located in the same city, county, state or even multi-state region.  Companies operating in the same industry can join together even if they operate in entirely different regions.  The ARP can be sponsored by a permitted group of employers if certain formalities are satisfied (the organization of employers must be bona fide, with organizational documents and control over the ARP in substance and in form, directly or indirectly, among other requirements).

      In the alternative, ARP members can now join together in a plan sponsored by a professional employer organization (PEO).  See Q 3767 and Q 3768.

      While the 2019 regulations were broadly seen as beneficial to interested small business owners, employers who choose this type of plan structure may continue to be subject to the “one bad apple” rule, absent further guidance from the IRS or DOL.

      Congress enacted the SECURE Act to even further ease the restrictions on the types of employers who can join together, assuming additional criteria are satisfied, and eliminate some of the risks associated with MEPs.  The SECURE Act permits MEP participation for employers who share no common interest apart from the desire to offer a retirement plan and eliminates the one bad apple rule.

      Under the SECURE Act, these types of MEPs are also called pooled employer plans (PEPs)—another name for a type of MEP that meets certain additional requirements to avoid the commonality of interest requirement and one bad apple rule.  The MEP-PEP, or open MEP, will be treated as a single retirement plan, so that the group will only be required to file a single Form 5500 to further reduce the administrative burdens for each of the individual employer-participants.

      This type of “open MEP” must be administered by a pooled plan provider (generally, a financial services firm).  Use of the pooled plan provider to act as both plan administrator and a fiduciary with respect to the plan is intended to ease both the administrative burden and fear of fiduciary liability for small business owners.

      The pooled plan provider must register as a fiduciary with the Treasury Department and the DOL.  The pooled plan provider also must have a trustee responsible for monitoring contributions and dealing with subsequent issues that arise.

      Small business clients should understand that, as employer, they continue to bear fiduciary responsibility with respect to selecting and monitoring the pooled plan provider.  Pooled plan providers can outsource investment decisions to another fiduciary (likely what is known as a “3(38) fiduciary”).  This arrangement does spread the costs of investment advice among the MEP participants to reduce expenses, but the extent of the employer’s fiduciary exposure still remains unclear under the law.