There are two different sorts of 401(k) plans: Single Employer plans and Multiple Employer plans. The plan you’re considering is a Multiple Employer Plan (MEP), which has some distinct advantages over a single plan.
A multiple employer plan (MEP) is a retirement savings plan adopted by two or more employers that are unrelated for taxation purposes, as defined by the Internal Revenue Service (IRS) and, therefore, the U.S. Department of Labor (DOL). The MEP may be a defined-benefit retirement plan or a defined-contribution pension plan like a 401(k).
Each multiple employer plan is organized and run by an entity referred to as the MEP sponsor. The MEP sponsor is liable for administrative duties and, in most cases, has fiduciary liability for the plan. Companies that join the MEP are referred to as “adopting employers.”
The multiple employer plans were created in order to encourage more small businesses to supply their employees with a tax-advantaged retirement savings plan. Companies that do not have the resources or the bureaucracy to handle a pension plan independently can pool together to share the burden.
Additionally, being a part of a multiple employer plan does provide a reduction of fiduciary risk, in conjunction with fiduciary support, because the roles and responsibilities are usually assumed by the MEP sponsor, not the individual employers.
Choosing to join a multiple employer plan shouldn’t lull employers into a false sense of security. Being a part of an MEP doesn’t absolve you of your fiduciary liability — the liability is the same as with a stand-alone plan. While much is transferred to the MEP plan sponsor, the participating company retains responsibility for the initial movement of cash from the corporate coffers, through the payroll processor, to the pension plan.
Initially, there have been two main kinds of MEP, closed and open. A 3rd type, the association retirement plan, was added in 2019.
Closed multiple employer plans are created from more than one unrelated employer (with employees) and a sponsor that’s a good faith group, association, or organization with which member employers share a nexus or interest aside from the retirement savings plan. Only member employers of the bona fide group can participate within the plan, and member employers must also be ready to make plan-related decisions.
Association pension plan
A relaxed sort of the closed MEP, an association retirement plan (ARP) allows unrelated employers, also as self-employed working owners, in several industries but with a physical presence within the same metropolitan area, region, or state, to join identical single-plan MEP. The rule also allows companies in the same industry, although they don’t share a geographical connection, to join the same multiple employer plans.
Members don’t have any reference to one another apart from their participation within the same retirement savings plan. The open plan initially required each member company to possess and report on its own individual plan. That changed at the start of 2020 with a replacement law, the SECURE Act, that enables for a single retirement plan for all members of an open MEP.