Small employers could benefit from a PEP talk

April 05, 2023

women in small business office

Small employers can struggle to compete with major corporations. Not only do bigger companies typically have larger purse strings, they may also be able to offer more attractive benefits. As a result, small businesses sometimes miss out on recruiting top talent.Another recruiting challenge is that there are fewer potential employees to be had. Nearly every industry is struggling to attract and retain good workers, reflected in the unemployment rate that edged down to 3.5% at the end of 2022.1 

One way that smaller organizations can deliver more attractive benefits may be to participate in Pooled Employer Plans, often referred to as PEPs. These special plans may serve as another tool in a small employer’s recruitment and retention efforts. 

A PEP is a type of retirement plan that has been around for a while, but recent legislation has provided for more options that may deserve a second look.

What is a PEP?

Before we dive into what’s new, let’s outline what sets a PEP apart from traditional benefit plans offered to employees. Pooled Employer Plans are offered by third-party pooled plan providers (PPPs) that bring together multiple employers into a single defined contribution retirement plan, such as a 401(k). The provider acts as a fiduciary. 

PEPs may be referred to as a type of multiple employer plan (MEP) where participants do not need to be in related industries. PEPs can be suitable for small organizations that want to obtain more favorable retirement plan investment options and less costly management services.

Changes resulting from the SECURE Act of 2022

In the final days of 2022, President Biden signed into law the “Consolidated Appropriations Act, 2023.”2 This legislation includes the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0). 

Within this legislation are many provisions intended to help the American people increase their retirement savings by expanding retirement options and, in some cases, easing restrictions on some types of retirement plans, including PEPs. The following are a few updates to be aware of.

Startup tax credit for employers

Previously, if an employer joined a PEP that was already in existence for three years or more, the employer could not claim a startup tax credit. The new legislation allows employers joining a PEP to be eligible for the tax credit for all three years, regardless of how long the PEP has been in existence. Such a tax credit could reduce the amount of taxes an employer owes. This new ruling is effective retroactively for taxable years beginning in 2020.3 

Clarification on fiduciaries

Previous rules surrounding PEPs were a little vague regarding who could collect plan contributions. The latest ruling clarifies that a PEP can designate a fiduciary (other than an employer in the plan) to collect contributions. The fiduciary must be diligent and implement reasonable and systematic written contribution collection procedures.3 

Potential future changes

Regulations surrounding investments and taxes are continually evolving. SECURE 2.0 hints at these changes by requiring the Department of Labor Secretary to conduct a study on the PEP industry. This report likely won’t be completed for another five years, however, so plan sponsors will need to wait and see whether further recommendations will be made.3 

Should small employers consider PEPs?

Small business owners need all the help they can get to attract and retain good employees, and retirement benefits can be an important piece of the puzzle. 

While PEPs can help provide competitive retirement benefits, organizations need to know that PEPs may not offer as much customization or features as a traditional 401(k) defined contribution plan. No matter the type of retirement plan a company offers, it’s important to work with a reputable provider who understands the complexities of various opportunities and also acts as a fiduciary. 

When exploring options, ask about the types of investments, matching contribution capabilities, rollovers, online resources, and whether employees can receive financial guidance as part of the plan. From there, a plan provider can help outline the options and determine the best path forward.

1, The Employment Situation — December 2022, January 6, 2023
2, Bill Signed: H.R. 2617, Dec. 29, 2022
3, SECURE 2.0 Act of 2022, 2022