When choosing employee benefits, employers need to consider what kind of retirement plan they are going to offer. Based on the structure of the company, employers can choose between different types of plans, including a multiple employer plan or a multiemployer plan. Both of these plans have different advantages that employers should consider when making their decisions.
What Is a Multiple Employer Benefit Plan?
A Multiple Employer Plan (MEP) is a retirement plan used by two or more employers. These employers must not be related under IRC §414(b) (controlled groups), IRC §414(c) (trades or businesses under common control), or IRC § 414(m) (affiliated service groups). It’s important that these employers follow the qualification rules outlined in IRC §413(c).
Under an MEP, employees of different private-sector companies can join a single tax-qualified retirement plan. An association or group of employers or a Professional Employer Organization (PEO) sponsors these plans.
There are two types of MEPs: closed and open. A closed MEP receives sponsorship from a bona fide group or association. A bona fide group is open to organizations that share an interest or relationship. An open MEP does not get recognition from a bona fide group, meaning employers sometimes can’t take the full cost savings or reduced fiduciary responsibility benefits.
The Advantages of a Multiple Employer Plan
An MEP can be beneficial to both employers and their employees. Participating in an MEP can lower costs associated with forming and managing a broad retirement plan that follows the Employee Retirement Income Security Act of 1974 (ERISA). Employers can use multiple employer plans to work together and combine their resources, which can save these employers money.
MEPs make it possible for small businesses to offer their employees low-cost investments typically provided by large companies only. The lower fees for investments also help businesses avoid lawsuits for allowing plan participants to pay excessive investment fees. Avoiding lawsuits is another way small businesses can lower their operating costs. Another advantage of MEPs is that they lower an individual employer’s fiduciary risks and responsibilities because the plan sponsor tends to be in charge of administrative and fiduciary roles.
Recent Law Changes Regarding Multiple Employer Plans
Several law changes could grow the number of MEPs available to employers. These new laws could influence additional small businesses to provide retirement plans for their employees. One of the law changes the IRS involved the penalties of the “one bad apple rule,” which states that if one employer participating in an MEP failed to fulfill a qualification requirement within the plan, the whole MEP could lose its tax-qualified status. This rule would prevent some businesses from taking the risk.
Another change is that the Department of Labor (DOL) now allows chambers of commerce and other associations to sponsor an MEP that is an Association Retirement Plan (ARP). An ARP is a closed MEP that makes it simpler for self-employed owners and small businesses to provide a retirement savings plan to employees. It reduces the fiduciary responsibility these parties have, which helps businesses with a lack of resources. This is good news for people who previously wouldn’t consider working for a small business due to the lack of benefits.
The Difference Between a Multiple Employer Plan vs. a Multiemployer Plan
Although multiple employer plans and multiemployer plans sound quite similar, there are some key differences between these two kinds of plans that concern multiple employers. First of all, a multiple employer plan is a pension plan that multiple employers manage. The reason more than one employer maintains this plan is that through a joint effort, they can lower administrative expenses and pool their plan’s assets. This type of plan is also beneficial for investing purposes.
A multiemployer plan is a plan that uses collective bargaining. Similar to a Multiple Employer Plan, multiple employers manage it. These employers tend to work in similar industries and labor unions. Some groups refer to multiemployer plans as “Taft-Hartley” plans. They must adhere to the qualification rules under IRC §414(f).
Employees who work in unionized fields can benefit from multiemployer plans. If they want to work for a different employer within their industry, they may be able to continue the retirement plan they had with their previous employer. Employees who work for construction, trucking, or chain grocery store companies tend to benefit from multiemployer plans.
What Are Taft-Hartley Plans?
Taft-Hartley plans are multiemployer plans sponsored by a board of trustees. The board is made up of members that equally represent management and labor. They are in charge of the entire administration and operation of this kind of plan. It’s their job to find people who are qualified for specific administrative duties.
Certain industries also choose multiemployer plans that aren’t considered Taft-Hartley plans. The sports industry is a prime example. These kinds of plans include contributions from one or more collective bargaining agreements and multiple employers. Unlike a Taft-Hartley plan, there is no board of trustees to manage the trust funds.
The Advantages of Multiemployer Plans
Employees in unionized industries reap the benefits of multiemployer plans. Their benefits are more secure because multiple employers take on the risk associated with the plan. Multiemployer plans make it easy for these employees to change employers within the same industry while still having the same benefits within the plan.
These employees benefit from not having to wait for their new benefits to begin. Instead, their existing benefits simply transfer to their new jobs, and they don’t experience a gap in their coverage. Employers that have a union workforce also benefit because they aren’t solely taking on all the risk.
Both multiple employer plans and multiemployer plans come with many advantages for businesses and employees alike, and Human Interest can help you determine which is right for your team. Knowing the differences between the two can help you make an informed decision about the type of plan you want to offer.
Human Interest offers a variety of plans that can help your team save for their future. Contact us if you have questions about what plans you should offer, or take a look at our blog for more resources about retirement savings.
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The Human Interest TeamWe believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.
