Multiple Employer Plans (MEP): A Guide for Small Businesses – As a small business owner, you may want to offer a retirement savings plan to your employees, but you may also face some challenges and barriers in doing so. For example, you may not have the time, resources, or expertise to set up and administer a plan on your own. You may also be concerned about the costs, complexity, and liability involved in offering a plan.
One possible solution is to join a multiple-employer plan (MEP), which is a retirement savings plan maintained by two or more unrelated employers. By participating in a MEP, you can share the administrative burden and fiduciary responsibility of offering a plan with other employers, and potentially reduce the costs and risks involved. You can also provide your employees with a tax-advantaged way to save for retirement and enjoy some tax benefits yourself.
In this article, we will explain what an MEP is, how it works, what are its advantages and disadvantages, and how it compares to other types of retirement plans.
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What Is MEP?
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). The MEP can be a defined-benefit pension plan or a defined-contribution retirement plan such as a 401(k).
Who Can Sponsor MEP?
Each MEP is organized and run by an entity known as the MEP sponsor. The MEP sponsor is responsible for administrative duties and, in most cases, has fiduciary liability for the plan. The MEP sponsor can be one of the following:
- One of the participating employers
- A trade group or association
- A third-party service provider
Who Can Join a MEP?
Companies that join the MEP are known as “adopting employers.” Adopting employers must sign an agreement with the MEP sponsor to adopt the plan and abide by its terms and conditions. Adopting employers can choose some features of the plan for their own employees, such as contribution rates and vesting schedules, but they must follow the overall plan design and rules set by the MEP sponsor.
Why Was the MEP Created?
The MEP was created to encourage more small businesses to offer their employees a tax-advantaged retirement savings plan. Companies that don’t have the resources or the bureaucracy to handle a retirement plan independently can pool together to share the burden.
How Does a MEP Work?
MEP works similarly to a single-employer retirement plan, except that it covers employees of multiple unrelated employers. The MEP sponsor establishes and maintains the plan document, files annual reports with the IRS and DOL, selects and monitors the investment options, provides participant disclosures and notices, and performs compliance testing. The MEP sponsor may also act as the trustee of the plan assets, or delegate this role to another entity.
What Are the Responsibilities of Adopting Employers?
Adopting employers must make contributions to the plan on behalf of their eligible employees, according to the plan document and their own adoption agreement. Adopting employers must also provide payroll data and employee information to the MEP sponsor or its designated administrator, and distribute enrollment materials and educational resources to their employees.
What Are the Benefits for Employees?
Employees who participate in the MEP can make elective deferrals from their paychecks to the plan, up to the annual limit set by the IRS ($19,500 in 2021). Employees may also receive employer contributions from their adopting employer, such as matching or profit-sharing contributions. Employees can choose how to invest their account balances among the investment options offered by the MEP sponsor. Employees can also access their account balances online or by phone, and receive periodic statements and updates from the MEP sponsor or its administrator.
What Happens When Employees Leave Their Adopting Employer?
Employees who leave their adopting employer can keep their account balances in the MEP, roll them over to another retirement plan or IRA, or cash them out (subject to taxes and penalties). Employees who move to another adopting employer within the MEP can continue to participate in the plan without interruption. Employees who move to an employer outside the MEP can transfer their account balances to their new employer’s plan, if allowed, or to an IRA.
What Are the Advantages and Disadvantages of a MEP?
A MEP can offer some advantages and disadvantages for both employers and employees, compared to other types of retirement plans. Here are some of the main pros and cons of MEP:
Advantages
- Cost savings: By joining a MEP, employers can share the administrative costs and fees of offering a plan with other employers, and potentially negotiate lower rates with service providers. Employees can also benefit from lower investment fees and expenses due to economies of scale.
- Reduced complexity: By joining a MEP, employers can delegate most of the administrative and fiduciary duties of offering a plan to the MEP sponsor, and avoid dealing with multiple service providers. Employees can also enjoy a simplified enrollment process and a consistent plan experience across different employers.
- Enhanced compliance: By joining a MEP, employers can rely on the MEP sponsor to perform the required compliance testing and reporting for the plan, and avoid potential penalties or corrections for non-compliance. Employees can also benefit from a more secure and compliant plan that meets the IRS and DOL standards.
- Increased participation: By joining a MEP, employers can offer a more attractive and competitive retirement savings plan to their employees, and potentially increase their retention and recruitment. Employees can also benefit from a more diversified and flexible investment menu, and potentially achieve higher savings rates and outcomes.
Disadvantages
- Loss of control: By joining a MEP, employers have to give up some control over the design and operation of the plan, and follow the rules and decisions of the MEP sponsor. Employees may also have less choice or input over the investment options or features of the plan.
- Shared liability: By joining MEP, employers may still have some fiduciary liability for the plan, especially if they select or monitor the MEP sponsor or make contributions to the plan. Employees may also be exposed to the risk of mismanagement or fraud by the MEP sponsor or other adopting employers.
- Limited availability: By joining MEP, employers may have to meet certain eligibility criteria or requirements set by the MEP sponsor, such as industry affiliation, geographic location, or minimum size. Employees may also have limited access to other types of ret
Multiple Employer Plans (MEP)
Multiple Employer Plans (MEP)
Multiple Employer Plans (MEP)
Multiple Employer Plans (MEP)