September 21, 2022

Pooled Employer Retirement Plan

Just like any other type of business, construction companies typically need to offer a solid benefits package to full-time employees. Failing to do so could mean falling behind in the race for talent in today’s tight job market.

Yet construction businesses tend to operate under much more difficult cash-flow strains than other kinds of companies. This makes offering top-tier benefits difficult. The good news is, thanks to the Setting Every Community Up for Retirement Enhancement Act of 2019, a new type of retirement benefits plan is now available. It’s called a pooled employer plan (PEP).

Strength in numbers

PEPs are a relatively new variation on an existing retirement plan model: multiple employer plans (MEPs). A MEP is a defined contribution retirement plan, typically a 401(k), maintained by two or more employers. The plan sponsor may be one of the participating employers or a third party, such as a trade association or professional employer organization.

MEPs offer several advantages. Group purchasing power and other economies of scale tend to lower the overall cost of sponsoring the plan. Also, participating employers avoid time-consuming and often disruptive administrative tasks. Plus, they can shift some — though not all — of their fiduciary duties and liability exposure to the MEP sponsor.

That MEP sponsor is responsible for plan design and day-to-day management. It coordinates with various third-party service providers, handles compliance issues, and oversees annual audit and reporting requirements. The sponsor can also provide participating employers with access to expertise and advanced technology that the participants might otherwise be unable to afford.

Not all sunshine and roses

However, traditional MEPs have drawbacks. For one thing, to be treated as a single employer plan for reporting, audit and administrative purposes, a MEP must be “closed.” That is, its members must share some “commonality of interest,” such as being in the same industry or geographical location.

Employers that join “open” MEPs, which don’t require a commonality of interest, are treated as if they maintained separate plans with their own reporting, audit and other compliance responsibilities. (Note: Certain smaller plans — generally, those with fewer than 100 participants — aren’t subject to audit requirements.)

Another drawback of traditional MEPs is the “one bad apple” rule. Under that rule, a compliance failure by one participating employer can expose the entire MEP to the risk of disqualification.

The promise of PEPs

A properly designed PEP avoids both the commonality-of-interest requirement and the one bad apple rule. PEPs are treated like single employer plans for reporting, audit and other compliance purposes — even if they allow unrelated employers to join. One participating employer’s compliance failure won’t jeopardize a PEP’s qualified status so long as the plan contains certain procedures for dealing with a participant’s noncompliance.

PEPs are available from “pooled plan providers” (PPPs), which include financial services companies, insurers, third-party administrators and other firms that meet certain requirements. For example, PPPs must:

  • Register with the U.S. Departments of Labor and the Treasury,
  • Sign a written acknowledgement that they’re the PEP’s named fiduciary and plan administrator, and
  • Ensure proper bonding of those who serve as fiduciaries or handle plan assets.

Although PEPs eliminate some of the obstacles that make traditional MEPs impractical for many companies, they’re not without disadvantages. For instance, PEPs have limited flexibility to customize plan designs or investment options to meet the needs of specific employers and their employees.

Also, while one of the advantages of PEPs is cost savings, they may increase costs for participating employers in one area. That’s because small employers aren’t subject to annual audit requirements, but PEPs are. So, small employers that join a PEP will have to bear annual audit costs they otherwise wouldn’t, though these costs are spread out among participants.

Due diligence demanded

Does a PEP sound like a potentially good fit for your construction company? If so, be sure to do plenty of due diligence before joining one. Your legal, financial and benefits advisors can all help you make a sensible decision.

The content featured in this article originates from our bi-monthly Contractor Newsletter. Subscribe below and stay in the know.