Pooled Employer Plan (PEP)

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  What is a Pooled Employer Plan (PEP)?

  • Designed to benefit employees of two or more adopting employers, PEPs are qualified retirement plans that can be sponsored and offered only by a Pooled Plan Provider (PPP). Employers that adopt a PEP need not share a business nexus to form this group 401(k) Plan; thus PEPs are sometimes referred to as “open MEPs”.
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  What are the Key Characteristics of a PEP?

  • PPPs must meet the requirements outlined in ERISA Section 3(43) as well as other requirements outlined by the US Treasury Department.
  • A PPP must register with the US Secretary of Labor 30 days before beginning operations, and also satisfies the SECURE Act requirement that the PPP must register with the Treasury Department.
  • In addition to the PPP, there is a centralized 3(21) Investment Advisor and/or 3(38) Investment Fiduciary, as well as a 3(16) Plan Administrator.
  • A PEP is auditable if it exceeds 100 eligible participants in total across all adopting employers.
  • Employers adopting a PEP plan for their 401(k) may have challenges combining the 401(k) with a Defined Benefit or Cash Balance Plan, depending upon the flexibilities the PEP will permit.
  • One Form 5500 is filed for the entire plan.
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  What are the Necessary Documents?

  • Plan Document — retained by the PEP Sponsor.
  • Adoption Agreement — Provides the provisions available in the PEP and retained by the PEP Sponsor.
  • Participation Agreement — Created for and signed by each adopting member to include the specific provisions of their retirement offering.
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  What are the Limitations of a PEP?

  • Fixed fund lineup — All adopting employers share one common fund lineup. Generally, the Plan Sponsor or Investment Fiduciary makes additions to or removals from the lineup; notification must be provided to all eligible individual participants.
  • Audit possibility — Although PEPs have a more lenient policy on audit requirements than MEPs, a PEP could still combine enough small plans and eligible participants to become auditable in a short span of time, which would impact costs adversely.
  • PPP fiduciary liability — Each adopting employer within a PEP retains fiduciary liability for the selection and monitoring of the PPP.
  • Accessibility — Any adopting employers, service providers and fiduciaries with a PEP can be removed from the plan by the PPP.
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  PEP Requirements

  Requirement	PPP Responsibility	Employer Responsibility
  Plan document meets qualification and legal standards	Yes	No
  PPP named as plan fiduciary	Yes	No
  Administrative functions handled	Yes	No
  Registered with Department of Labor	Yes	No
  Trustee manages contributions and plan assets	Yes	No
  Investment decisions delegated to manager	Yes (when appointed)	No (if manager is appointed)
  Remove non-compliant employers to protect plan status	Yes	No

   

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  Employer Responsibilities

  	Employer	PPP
  Select and regularly review the PPP and other plan fiduciaries	Yes	No
  Make timely contributions, including employee deferrals	Yes	No
  Provide employee census updates and business structure changes	Yes	No
  Inform eligible employees about the PEP	Yes	No (but may assist)

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  Fiduciary and Administrative Responsibilities

  The chart below illustrates the comprehensive role of a PPP and PEP in serving as both the 402(a) named fiduciary and the 3(16) plan administrator, compared to various service providers who claim to offer “3(16) plan administrator fiduciary” services but frequently shift significant responsibilities back to employers. As shown, the named fiduciary support provided by PPPs and PEPs is significantly more extensive, effectively relieving participating employers of all responsibilities for the listed tasks.

  Function	PPP (Named Fiduciary + 3(16) Admin)	Typical 3(16) Provider	Employer Responsibility
  Maintain current PEP document with legal compliance	Yes
  Operate PEP per terms, IRS, and ERISA regulations	Yes
  Select and monitor service providers	Yes
  Ensure correct compensation definition is used	Yes
  Comply with nondiscrimination and top-heavy rules	Yes
  Ensure timely contributions via trustee monitoring	Yes
  Comply with controlled/affiliated group rules	Yes
  Maintain fidelity bond	Yes
  Meet ADP and ACP testing	Yes
  Ensure contribution limits are not exceeded	Yes
  Ensure vesting is properly calculated	Yes
  Approve participant loans via fiduciary	Yes
  Ensure that investment options are carefully chosen and suitable for all participants and beneficiaries	Yes, in most cases, through the ERISA §3(38) investment manager appointed by the PPP		No, unless the PPP has not appointed an ERISA §3(38) investment manager for the PEP
  Prevent prohibited transactions	Yes
  Ensure service provider disclosures (ERISA §408(b)(2))	Yes
  Ensure clear service agreements	Yes
  Confirm provider compensation is reasonable	Yes
  Ensure proper fee allocation	Yes
  Handle revenue sharing appropriately	Yes
  Comply with ERISA §404(c) rules	Yes
  Ensure QDIA and notice provision	Yes
  Ensure proper recordkeeping of contributions	Yes
  Confirm fiduciary standard of investment manager	Yes
  Provide participant education (if desired)	Yes
  Support portfolio diversification (via §3(38))	Yes in most cases, through the ERISA §3(38) investment manager appointed by the PPP		Yes in most cases, through the ERISA §3(38) investment manager appointed by the PPP
  Prepare and file Form 5500	Yes	Yes
  Ensure coverage and enrollment compliance	Yes	Yes
  Ensure contribution limit compliance	Yes	Yes
  Calculate vesting correctly	Yes	Yes
  Administer participant loans per policy	Yes	Yes
  Process distributions per plan rules	Yes	Yes
  Administer RMDs	Yes	Yes
  Comply with direct rollover provisions	Yes	Yes
  Provide required disclosures and notices	Yes	Yes
  Ensure proper processing of loans, withdrawals, and distributions	Yes	Yes