Multiple employer plan (MEP) and PEO 401(k) plan

What a MEP is

In a multiple employer plan, several unrelated employers adopt the same plan document and share one trust, one set of service providers and one Form 5500. Traditionally the employers needed something in common, such as membership in the same trade association or use of the same professional employer organization (PEO). Department of Labor rules from 2019 confirm that a bona fide group or association, or a bona fide PEO, can sponsor a MEP. A pooled employer plan (PEP) is a newer kind of MEP that drops the common-interest requirement.

PEO 401(k) plans

When a company joins a PEO, its workers are co-employed by the PEO. The IRS position, in Revenue Procedure 2002-21, is that a PEO’s retirement plan covering client worksite employees must be run as a multiple employer plan, with each client company as an adopting employer.

Why it matters to employers

A MEP can reduce your administrative work, because the plan sponsor handles the document, filing and vendors. It does not remove your responsibilities. Each adopting employer is tested separately for coverage and nondiscrimination, must send contributions on time, and has a fiduciary duty to choose and monitor the arrangement prudently.

If you leave a PEO, you usually leave its MEP. Your employees’ balances then need to move to a new plan through a spin-off or stay behind until they can be distributed, so plan the exit before you give notice.

Common mistakes

• Assuming the PEO plan’s testing covers you. Your own highly compensated employees are measured against your own workforce.

• Forgetting your other businesses. Controlled group members count when you test.

• Leaving a PEO without a plan for existing balances and loans.

• Believing one employer’s error can never affect the plan. SECURE Act rules limit that risk, but only if the plan follows the required procedures.