President Trump’s August 2018 Executive Order urged the U.S. government to consider taking actions that would help make workplace retirement plans available to more Americans.
The directive specifically recommended expanding access to multiple employer plans (MEP), which could help smaller employers by:
- Limiting fiduciary responsibility (employers are responsible for choosing and monitoring the arrangement and forwarding required contributions to the MEP),
- Simplifying plan administration so employers can focus on running their businesses, and
- Reducing the expense of workplace plans by offering economies of scale
The Department of Labor response was remarkably rapid. In October 2018, the agency proposed “…a regulation under title 29 of the Code of Federal Regulations to expand access to affordable quality retirement saving options by clarifying the circumstances under which an employer group or association or a professional employer organization (PEO) may sponsor a workplace retirement plan.”
While clarification is welcome, it does not resolve some of the issues that have made small business owners reluctant to adopt MEPs.
For example, businesses are still required to have a common business association or interest in order to form a MEP.
In addition, the proposed regulation failed to address:
- The “one bad apple” rule. If one employer participating in a MEP violates IRS rules, the plan may be disqualified for all employers. While the IRS encourages corrections, the plan’s MEP administrator is responsible for making them and will need to work with the employer that is in violation to do so. Plan design will determine who pays the costs associated with corrections.
- Plan termination complexities. An employer participating in a MEP cannot terminate the plan because it is not the plan sponsor. If a small business wants to end its participation in a MEP and give plan participants an opportunity to remove their savings from the plan, the employer must complete appropriate paperwork, establish a successor plan, spinoff assets into that plan, and then complete plan termination.
- Lack of control over the plan. When an employer sponsors a workplace retirement plan, it chooses the plan design and plan service providers. When a change is needed, it can amend its plan, change service providers, or take other necessary actions. As a MEP member, the employer does not have the same level of control. As a result, it’s critical to thoroughly understand the MEP’s plan design features, investment choices, and other plan aspects before joining. It’s a good idea to review the opportunities and limitations of a MEP with an ERISA attorney before joining.
It’s possible that legislation currently wending its way through Congress will address some of these issues and make MEPs more attractive for smaller employers.
Until that happens, businesses should explore the other options available to them.
Small businesses have retirement plan options
A significant proportion of smaller business owners are unfamiliar with the retirement plan options available to them. Some perceive the cost would be too high and the administrative requirements too difficult.
In a 2017 report, Pew explained that most of the smaller business owners participating in their survey “…did not have a full understanding of how 401k plans work, and few were familiar with plans or incentives designed for small businesses, such as the Simplified Employee Pension Plan (SEP), the Savings Incentive Match Plan for Employees (SIMPLE), or the small employer tax credit for retirement plan startup costs.”
These retirement plan options let business owners and employees who participate in the plan make pretax contributions, and any earnings grow tax-deferred until distributions are taken.
In addition, they are relatively easy to set up and maintain.
One option, the SIMPLE, is a low-cost payroll deduction plan that:
- Permits limits on participation. Employees who have earned $5,000 during any two preceding years are eligible to participate. The feature may be attractive to companies that have young, part-time, and seasonal workers.
- Maximizes contributions. In 2018, participants can contribute up to $12,500 to a SIMPLE IRA (which will increase to $13,000 in 2019). Employers are required to make matching or non-elective contributions.
- Minimizes administration. SIMPLE IRAs have simplified reporting requirements relative to 401(k) plans, and there is no non-discrimination testing requirement.
- Offers tax incentives. Companies that sponsor SIMPLE retirement can take tax deductions for contributions to employees’ accounts and may be eligible to receive tax credits of up to $500 per year for three years to cover start-up and employee education costs.
Companies that do not have a retirement plan and have 100 or fewer employees qualify to offer SIMPLE IRAs.
If employers prefer not to make matching contributions, workplace IRAs, which are also known as payroll deduction IRAs, could provide smaller businesses with an inexpensive retirement plan alternative.
Typically, IRA contribution limits are lower than those for SIMPLEs and SEPs.
Why should small business owners consider these plans?
There are many reasons for smaller businesses to offer retirement plans. Some companies want to help their employees. Others know that sponsoring a plan will make their firm more competitive and improve its ability to attract and retain talent.
Some companies have said a retirement plan helps communicate stability and commitment.
Here’s another reason: federal and state governments are concerned about the retirement crisis in the United States and have been taking steps to encourage higher levels of workplace retirement plan sponsorship and participation.
Currently, about one-third of private sector workers do not have access to workplace plans.
The effort to reduce that number has included the President’s directive on MEPs and several states implementing IRA payroll deduction plans that require employers who do not sponsor plans to automatically enroll employees and contribute a percentage of their wages or salaries to the programs.
There has been significant opposition to mandated programs, but some perceive them to be a solution with merit.
Small business owners who want the freedom to choose plans that suit their companies’ needs should educate themselves about the options available.
Before retirement, Terry Dunne was the senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 40 years of consulting experience in the financial services industry. He has written extensively on retirement planning, industry trends, technology, and legislation. Millennium Trust performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.
