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Open MEPs Gaining Traction as Retirement Plan Option for Those Without Workplace Program

Compliance
Article
09/01/2017
  • Some municipalities and states are proposing or establishing multiple employer plans — open MEPs — to assist private-sector employees with no access to workplace retirement programs.
  • MEPs are single plans adopted by two or more unrelated employers.
  • MEPs are tax-qualified 401(k) plans that meet ERISA requirements under IRC 413(c).
  • A MEP reduces administrative burden for the individual employers participating. It also decreases an employer’s fiduciary liability.
  • New York City and Vermont have established open MEPs; Philadelphia and New Jersey have MEP proposals up for consideration.
  • An open MEP may present the perfect opportunity for small companies to test the retirement plan waters, but in the long run, employer-sponsored 401(k) program provide the most benefit and flexibility.

MEPs help workers without employer-based retirement savings plans

Increasingly, states and cities are proposing legislation to sponsor multiple employer plans — open MEPs — to assist private-sector employees without access to workplace retirement programs. The activity comes in response to the looming U.S. retirement crisis. More than half of American workers — about 55 million — don’t have employer-based retirement savings plans available to them. Particularly affected are those who work for small companies, as well as younger workers, minorities, and low- to moderate-income earners.

A state- or city-sponsored open MEP is a single plan adopted by two or more unrelated employers. It’s a tax-qualified program, typically a 401(k), that meets all the requirements of the Employee Retirement Income Security Act (ERISA), a federal law that sets minimum standards for retirement plans in private industry and protects their assets.

Open MEP plan rules:

  • Also described as “pooled employer plans” in the retirement industry;
  • Pools the money of all participants in a single trust account;
  • Each participating employer may maintain their own benefit formula as long as it meets the coverage and discrimination rules, tested as if it were a single employer plan;
  • A single Form 5500 is filed, and a single audit at the MEP level is required; and
  • Many duties may be outsourced to service providers or external experts.

Open MEP regulations include the “bad apple” rule: The negligence of one participating employer toward its program duties can disqualify the entire plan. For example, a business may fail to process employee contributions, or does not correct nondiscrimination failures.

Open MEP programs beginning to take shape in cities and states

Several states and major cities have recently passed or proposed legislation, or released recommendations to sponsor retirement open MEP plans for private sector employers. Each of these programs aims to combat potential budgetary impacts, and the human and societal costs of retired workers without adequate financial resources.

 

Vermont (Green Mountain Secure Retirement Plan)

New Jersey (Garden State MEP)

City of Philadelphia Open MEP

New York City (Empire City 401(k) MEP)

Status of Legislation/Proposal

Signed by Governor June 8, 2017

Introduced May 18, 2017

Proposal released June 7, 2017

Proposal released October 13, 2016

Model/Account Structure

Multiple Employer Plan (MEP)

Multiple Employer Plan (MEP)

Multiple Employer Plan (MEP)

Multiple Employer Plan (MEP)

Employer Participation

Voluntary

Voluntary

Voluntary

Voluntary

Employers Covered

Self-employed individuals and employers with 50 or fewer employees who do not currently offer a retirement plan

Open to all employers in the state

Not specified

Not specified

Employee Participation

Voluntary, opt-out

Voluntary, opt-out

Voluntary, opt-out

Voluntary, opt-out

Employee Automatic Enrollment

Yes

Yes

Yes

Yes

Employee Default Contribution Rate

Not Specified

Not Specified

Not Specified

Not Specified

The movement toward open MEPs comes as the federal government ends myRA, a nationwide retirement savings program established in 2015 to provide individuals with access to retirement savings accounts. In late July 2017, the U.S. Treasury Department announced the phase-out of myRA due to high operational costs and low demand. 

Impact to businesses and their workers

Once state and municipal open MEP programs get off the ground, eligible small businesses will have the opportunity to help their workers build savings for retirement. Nevertheless, a company-sponsored retirement plan remains the strongest attraction for prospective hires.

The competition for talent will continue to increase as younger generations expect employers to offer benefits to help them repay their student loan debt and prepare for retirement. Business owners should consider offering a workplace retirement program now, rather than waiting for a state or city MEP to emerge. By preparing their workforces for retirement, small companies maintain a competitive edge while implementing strategic and succession planning.

Most government-run MEPs will take time to materialize and become operational. Policymakers are beginning to understand the long-term benefits of businesses offering 401(k) arrangements for employee retirement, as they provide the most flexibility in plan design. 401(k) plan contribution limits — both pre- and post-tax — are much greater than those for IRAs. In addition, state MEPs will likely have limitations that may not work well for all employers. For example, Vermont’s MEP doesn’t currently allow an employer to provide matching funds to enrolled workers.

While an open MEP may present the perfect opportunity for small companies to test the retirement plan waters, a 401(k) program sponsored by the small-business owner will provide the most benefit and flexibility in the long run.

Company 401(k) plans offer greatest benefits to businesses, employees

If you believe that your firm is in a position to offer a 401(k) retirement savings plan, don’t wait for a state- or city-sponsored MEP to come to your area. An experienced vendor can design a plan based on your business’ needs and your employee base. Options might include a safe-harbor match, automatic enrollment, or a qualified default investment alternative.

Additionally, a financial services vendor can perform many key administrative and investment functions of a 401(k), so you can focus on running your business.

Paychex is a full-service provider of retirement plans for companies of every size. Consider the advantages of choosing a retirement plan to enhance the financial future of your business and employees: Make your company more competitive in the employment marketplace, improve employee retention, save on taxes, and give your employees confidence in planning for their future.

mike savage headshot

Michael joined the Compliance Risk organization of Paychex in March 2015 as Manager, Retirement Services Compliance. In this role, he oversees a team responsible for regulatory compliance of the Paychex retirement products, government and industry group relations, and business partner consulting. Before joining Paychex, Michael was the Sr. Manager of Client Services at EPIC Advisors, a Rochester, NY-based 401(k) provider with a niche in the banking industry.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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