While 401(k) plans must be established with the intention of continuing indefinitely, the IRS does allow employers to terminate their planwhen it no longer suits their business needs. Terminating most 401(k) plans is a straight-forward process. A notable exception is Pooled Employer Plans (PEPs) – a form of “open” Multiple-Employer Plan that pools the 401(k) assets of unrelated employers. This distinction can impose serious hardships on plan participants.
PEPs are a problem because employers lack the power to terminate their portion. 401(k) plans can only be terminated by their sponsor. That means the employer for single-employer plans and the Pooled Plan Provider (PPP) for PEPs.
This issue matters because a 401(k) plan termination is considered a distributable event by the IRS, allowing participants to rollover or cash out their account upon the termination date. With no distributable event triggered by a plan termination, participants can be trapped in a PEP until they quit their employer or become eligible for an in-service distribution.
Business owners should understand this issue if they are considering a PEP for their company.
Only the Plan Sponsor Can Terminate their 401(k) Plan
401(k) plans can only be terminated their sponsor. More specifically, the lead sponsor. Employers that co-sponsor a 401(k) plan – called participating employers - lack the power to terminate the portion attributable to their employees.
This is true for all 401(k) plans, including single-employer plans co-sponsored by a controlled group of employers, MEPs co-sponsored by members of a PEO or association, and PEPs co-sponsored by unrelated employers.
There’s a Workaround – But it’s Complicated
While employers cannot terminate their portion of PEP directly, there is a way they can create a distributable event for employees with a PEP account short of going out of business:
- Establish a brand new single-employer 401(k) plan
- Transfer employee 401(k) accounts from the PEP to the new plan
- Terminate the new plan.
That’s a pretty complicated solution. After all, a whole new 401(k) plan must be created solely for the purpose of terminating it. That means a new plan document and 5500 will be necessary. It also means participant sources (e.g., 401(k), rollover, employer match) and investments will need to be mirrored. Aplan blackoutmay also be required.
This solution probably isn’t going to be cheap either – it requires a lot of technical, detail-oriented work to start a new 401(k) plan and transfer participant balances to it without any problems.
Trapping 401(k) Accounts Can Have Consequences
When 401(k) accounts are trapped in a PEP, the consequences can be severe. Some possibilities include:
- Angry employees– Employees typically want control of their 401(k) account when their 401(k) plan is discontinued. When they can’t get control, bad feelings are often the result.
- Ongoing fiduciary liability– I think it’s safe to assume employers retain some fiduciary liability for 401(k) accounts trapped in a PEP. That means an ongoing responsibility to monitor the MEP for fee reasonableness and competence.
- No liability deadline – when employers terminate a single-employer 401(k) plan, there is an outer bound for their fiduciary liability – the 6-yearERISA statute of limitations. I think it’s safe to assume this 6-year clock keeps ticking as long as employees are trapped in a PEP.
Trapped by Design?
For almost 10 years, the financial services industry lobbied Congress hard to expand small business access to MEPs.The industry got its wish when the SECURE Act created PEPs – a form of “open” MEP that allows employers with nothing in common to participate.
This support can seem odd when you understand that PEPs are more difficult for 401(k) providers to administer correctly than a single-employer plan. It makes perfect sense when you understand that PEPs can be more profitable for providers by trapping accounts within the plan, collecting fees on those assets.
Business owners should understand this issue when weighing their 401(k) provider options.
FAQs
While 401(k) plans must be established with the intention of continuing indefinitely, the IRS does allow employers to terminate their plan when it no longer suits their business needs. Terminating most 401(k) plans is a straight-forward process.
What is a pep pooled employer plan? ›
What is a pooled employer plan? A PEP is a defined contribution plan, such as a 401(k), in which multiple employers can participate.
What is the disadvantage of a pooled employer plan? ›
Because PEPs pool assets from multiple employers, the plan sponsor may only offer a limited number of investment options to participants. This can limit the ability of participants to tailor their investment portfolios to their individual needs and risk tolerance.
What is a pep pension plan? ›
What is a Pooled Employer Plan? A pooled employer plan (PEP) is a 401(k) retirement plan that allows unrelated businesses to participate in one plan managed by a pooled plan provider (PPP).
Do PEPs require an audit? ›
PEPs that have 100 participants or more are required to have an annual financial statement audit.
Are pooled employer plans good? ›
A Pooled Employer Plan is a great solution if you don't currently offer a retirement plan but have considered doing so, or have a plan and are looking to significantly reduce your involvement with plan administration.
What are the benefits of a pooled employer plan? ›
PEPs have the potential to be less expensive than single-employer DC retirement plans, limit liability, and enable employers to outsource most of the compliance and administrative efforts associated with operating retirement plans.
What are the benefits of PEP 401k? ›
Pooled Employer Plans (PEPs) are a type of 401(k) plan that's designed to reduce employers'administrative and fiduciary responsibilities relating to the plan, which—as a retirement plan sponsor—means fewer hours spent reviewing your plan's investments and more time spent running your business.
How does a pooled employer plan work? ›
A Pooled Employer Plan (PEP) provides a simple, cost-effective solution for 401(k) and 403(b) retirement plans. A PEP allows employers of any size to pool their retirement plans into a single 401(k) or 403(b) plan.
What is the difference between PEP and MEP? ›
PEPs allow unrelated companies to offer a retirement plan
A PEP expands on what an MEP allows by permitting employers without a common nexus to band together to offer their employees a retirement plan. It offers virtually the same administrative simplicity and cost benefits as a MEP, but it has some differences.
Q: Who is the plan sponsor for a PEP? A: In a PEP, unrelated employers join a plan that is sponsored by a pooled plan provider (PPP). The PPP is the named fiduciary and entity responsible for management and administration of the PEP.
What are the three most common pension plans? ›
TYPES OF PENSION PLANS
There are three major types of retirement plans in the public sector: defined benefit (DB), defined contribution (DC), and hybrid plans.
What is the SECURE Act and PEP? ›
The SECURE Act created a new type of MEP called a Pooled Employer Plan (PEP). PEPs allow employers that don't share a commonality of ownership or industry to participate in a retirement plan that is independently sponsored by a pooled plan provider.
Are all PEPs high risk? ›
Politically Exposed Persons (PEPs) are often considered high-risk due to the nature of their role and influence in society.
What is the 80 120 rule for 401K? ›
The 80-120 rule allows organizations to file their Form 5500 in the same size category they filed in the previous year. For growing businesses, this means your organization may be able to file without a required audit, allowing your organization to concentrate on growth.
What triggers a 401K audit? ›
Participant or employee complaints about the benefit plan. Late or incomplete filing of the Form 5500. Alternative investments in the plan. Improper or excessive fees paid to service providers.
Is a pooled employer plan a multiple employer plan? ›
Created by the SECURE Act of 2020 and effective January 1, 2021, PEPs are a form of Multiple Employer Plan. In a PEP, a group of participating employers outsources all administration to a Pooled Plan Provider.
