Understanding Multiple Employer Plans: What They Are and Why They Matter
By Kristoffer Aas, QKA, EdM
Although multiple employer plans (MEPs) have been around for decades, they haven’t always had a starring role in the retirement industry. That, however, may be changing. During the last six years, new guidance has made MEPs more accessible and easier to maintain, making these plans more popular with employers.
MEPs offer several benefits—including allowing employers to pool their assets in order to reduce risk and cost while simplifying administrative duties, compliance, and reporting requirements. But there have also been two major requirements that have discouraged some employers from adopting a MEP.
The common interest rule required employers to have common economic or representational interests beyond providing benefits to employees in the same plan.
The one bad apple rule provided that if any employer in the MEP failed to satisfy IRS requirements, the entire MEP could be disqualified.
In addition, the Internal Revenue Service (IRS) and the Department of Labor (DOL) have different rules about whether the common interest rule must be satisfied to treat the MEP as a single plan. While the IRS does not require a common interest to exist, the DOL does. This difference in treatment represents the distinction between traditional closed MEPs and open MEPs, as explained next.
Traditional Closed MEP
This is a single defined benefit or defined contribution plan covering two or more unrelated employers that satisfies the common interest rule. The lead employer’s employees must be covered by the plan and the lead employer is typically a named fiduciary and the plan administrator. The plan files one Form 5500, completes one audit, and its ERISA bond is based on the total assets of the combined MEP.
Open MEP
An open MEP is a single defined benefit or defined contribution plan covering two or more unrelated employers that does not satisfy the common interest rule. Open MEPs are treated as a single plan by the IRS, but not by the DOL. An Open MEP can have the same investment selections and recordkeeper, but, because it’s not recognized as a single plan by the DOL, must comply separately with ERISA: meaning each employer must file a Form 5500, complete an annual audit (when required), and purchase an ERISA bond based on its portion of total plan assets.
Recent Guidance Provides Relief
2019 proved to be a good year for MEPs. The IRS released proposed regulations that provided relief from the “one bad apple” rule; the 2019 proposed regulations were withdrawn and replaced with new proposed regulations, which were released in 2022.
The DOL also released final regulations that created two new types of MEPs: association retirement plans (ARPs) and bona-fide professional employer organization (PEO) plans. And the SECURE Act of 2019 created a third type: pooled employer plans (PEPs), which are not subject to the common interest rule.
Association Retirement Plan (ARP)
An ARP is a single defined contribution plan covering two or more unrelated employers that 1) are in the same trade, industry, line of business or profession; or 2) have a principal place of business in a single state or metropolitan area.
The following requirements also apply to ARPs.
At least one substantial business purpose must be unrelated to benefits.
Each participating employer must employ at least one individual covered by the plan.
The association must have a formal organizational structure.
The plan must be controlled by participating employers (e.g., not a service provider).
Only former and current employees of participating employers, and their beneficiaries may participate in the plan.
The sponsor of the ARP cannot be a financial service firm (though it may be the trustee).
Bona Fide Professional Employer Organization (PEO) Plan
A PEO plan is a single defined contribution plan covering two or more unrelated employers where all the employers are clients of a “bona fide” PEO that performs and controls substantial employment functions for those employers, such as benefits and payroll services. Unlike the ARP, the PEO (not participating employers) controls the operation of the plan and continues to have obligations to participants even if an employer terminates its relationship with the PEO. Similar to the ARP, the PEO must guarantee that each employer has at least one employee covered by the plan. Lastly, plan participation is limited to current and former employees of the PEO and the employers, and their beneficiaries.
NOTE: Self-employed individuals may also qualify as an employer if certain criteria are satisfied, but those without common-law employees would be required to opt-in to participation in an ERISA-governed plan.
Pooled Employer Plan (PEP)
As previously mentioned, the SECURE Act created the PEP: a single defined contribution plan covering two or more unrelated employers, without requiring the common interest rule. A DOL-registered pooled plan provider (PPP) must manage the plan as a named fiduciary, plan administrator, and entity responsible for ensuring compliance with all Internal Revenue Code and ERISA requirements. Participating employers have limited fiduciary duties, such as managing its share of plan assets (unless management is delegated by the PPP to a third party), plan design changes, and timely deposit of contributions. The PPP can be a financial institution, insurance company, recordkeeper, third-party administrator, or law or accounting firm.
How does being in a MEP affect plan operations?
Each participating employer is treated as a separate employer for the following.
Minimum coverage testing
General nondiscrimination testing
ADP/ACP testing
Top-heavy testing
Determinations of highly compensated employees and key employees
Deduction limits
All participating employers of a MEP are treated as a single employer.
IRC Sec. 415 annual additions limit ($70,000 for 2025)
IRC Sec. 402(g) elective deferral limit ($23,500 for 2025)
Accrued service credits for eligibility and vesting, and eligibility for distributions
