Small- and mid-sized plan sponsors could benefit from the use of Open Multiple Employer Plans or MEPs, says law firm DrinkerBiddle.
According to the firm's recent white paper, "Open Multiple Employer Plans: Tax and ERISA Considerations," there are no policies under ERISA or the tax code to prohibit the formation of such plans.
A MEP is a single retirement plan that covers many unaffiliated employers, with a centralized administrative and fiduciary structure. And even though each employer included in the plan can offer its employees different offerings, all "MEP participants are treated as the employees of all the participating employers," the report said.
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Under the tax code, requirements that "generally apply to qualified retirement plans must be applied on a plan-wide basis by MEPS, such that the failure by one employer to maintain the plan in satisfaction of the qualification requirements of the Code will result in disqualification of the plan for all employers maintaining the plan," the report stated. DrinkerBiddle went on to say that the IRS does have a correction plan in place so it is unlikely that actions or inactions by one participating employer would cause the entire MEP to be disqualified.
"Further, it may be possible to draft plan provisions that would significantly ameliorate, if not entirely eliminate, this risk," the report said.
Under ERISA, there is a legal basis for establishing and maintaining MEPs and Open 401(k) MEPs, the report said.
"And given the advantages that Open 401(k) MEPs can provide—especially to small and mid-sized plan sponsors—it would seem that from a policy perspective there is no reason why the use of Open MEPs should be prohibited or restricted.
The report concludes that starting an Open 401(k) MEP is one of the "few options available for most employers that wish to comprehensively mitigate their fiduciary responsibilities and exposure to liability, and outsource their administrative compliance burden, while providing their employers with the maximum tax-deferral opportunity afforded under the Code, as well as possible tax-deferred employer contributions for retirement."
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