Smaller Businesses Now Have More Retirement Plan Options

The US Department of Labor (DOL) released a final rule that may make it easier for smaller businesses to provide retirement plans to their employees. According to the DOL, the rule will enable more small and midsize unrelated businesses to join forces in multiple employer plans (MEPs). These MEPs will provide employees and certain self-employed individuals with defined contribution plans, such as 401(k) or Savings Incentive Match Plan for Employees Individual Retirement Account (SIMPLE) IRA plans.


In October 2018, the DOL issued a proposed rule that clarifies when an employer group or association, or a professional-employer organization (PEO), can sponsor a MEP. A PEO is a company that contractually assumes some human resource responsibilities for its employer clients.  

The DOL rules authorize 401(k), or similarly defined contribution MEPs, through two approaches: association retirement plans (ARPs) and PEOs. The final rule, effective September 30, 2019, is similar to the proposal, but with some differences.

Benefits of MEPs

According to the DOL, businesses that participate in a MEP can see lower retirement plan costs as a result of economies of scale. For example, investment companies may charge lower fund fees for plans with greater asset accumulations. By pooling plan participants and assets in one large plan rather than multiple small plans, MEPs make it possible for small businesses to give their workers access to the same low-cost funds offered by large employers.

MEPs also let participating employers avoid some of the burdens associated with sponsoring or administering their own plans. Employers retain fiduciary responsibility for selecting and monitoring the arrangement and forwarding required contributions to the MEP, but they can effectively transfer significant legal risk to professional fiduciaries who are responsible for managing the plan.

Although many MEPs already exist, the DOL believes that previous guidance, as well as uncertainty about the ability of PEOs and associations to sponsor MEPs as employers under the Employee Retirement Income Security Act (ERISA), may have hindered the formation of plans by smaller employers. The final rule clarifies when an employer group or association or a PEO can sponsor a MEP.

Permissible MEP Sponsors

Under the final rule, by satisfying different criteria, the following can qualify as employers under ERISA for purposes of sponsoring MEPs:

  • Groups and associations
  • PEOs
  • Self-employed people

Groups and Associations

To classify as groups and associations of employers, entities must have a commonality of interest, among other requirements. This means that the employers in an MEP must either:

  • Be in the same trade, industry, line of business, or profession.
  • Have a principal place of business in the same geographic region that doesn’t exceed the boundaries of a single state or metropolitan area. A metropolitan area can include more than one state.

A MEP could therefore, for example, comprise employers in a national trade group or a local chamber of commerce.


The rule prohibits an entity from being classified as a group or association employer if it falls under any of the following categories:

  • Bank
  • Trust company
  • Insurance issuer
  • Broker dealer
  • Other similar financial services firm, including a pension record keeper or a third-party administrator

It also prohibits an entity from being owned or controlled by any of these entities or its subsidiary or affiliate. These entities can, however, be included in their capacities as employer members.


The final rule requires PEOs to, among other things, perform substantial employment functions for their client-employers that adopt the MEP. In contrast to the proposed rule, the final rule includes a single safe harbor for all PEOs, regardless of if they’re certified PEOs. Additionally, the new safe harbor includes only four criteria, rather than the proposed nine.


To be considered to perform substantial employment functions for its client-employers, the PEO must, for each client-employer that adopts the MEP:

  • Assume responsibility for, and pay wages to, employees without regard to the receipt or adequacy of payment from those clients.
  • Assume responsibility for paying and performing reporting and withholding for all applicable federal employment taxes, without regard to the receipt or adequacy of payment from those clients.
  • Play a definite and contractually specified role in recruiting, hiring, and firing workers and share responsibility with the client-employer in recruiting, hiring, and firing workers.
  • Assume responsibility for, and have substantial control over, the functions and activities of any employee benefit provided without regard to the receipt or adequacy of payment from those client employers for the benefits.

Self-Employed Individuals

So-called working owners without employees may qualify as both employers and employees for purposes of the requirements for groups and associations. These owners must meet the following criteria:

  • Have an ownership right in a trade or business, such as a partner or other self-employed individual.
  • Earn wages or self-employment income from the trade or business in exchange for personal services.
  • Work an average of at least 20 hours per week or 80 hours per month for the trade or business, or have wages or self-employment income from the trade or business that equals at least the working owner’s cost of coverage for participation by the owner and any covered beneficiaries in any group health plan sponsored by the group or association.

It must be determined if an individual qualifies as a working owner when they first become eligible for participation in the defined contribution MEP. Continued eligibility must be periodically confirmed using reasonable monitoring procedures.

An Open Issue

When it issued the proposed rule, the DOL solicited comments on open MEPs or pooled employer plans. These are specific contribution retirement arrangements that cover employees or employers with no relationship other than their joint participation in the MEP. Under current DOL rules, only closed MEPs are allowed, meaning small businesses must share common traits, such as being in the same profession or industry.

After reviewing the feedback, the DOL decided open MEPs deserve further consideration. As a result, it issued a 16-page request for information along with the final rule. Responses to the request for information are due October 29, 2019.

Additional Legislation

Unlike the DOL, the US Congress has authority to amend ERISA and other laws that affect retirement savings. In May 2019, the US House of Representatives passed legislation that would allow for open MEPs. The Setting Every Community Up for Retirement and Enhancement Act of 2019, commonly known as the SECURE Act, hasn’t yet advanced in the US Senate.

We’re Here to Help

If you have questions about how the final rule might benefit your company’s retirement plan, contact your Moss Adams professional.

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