What is a pooled employer plan?

A PEP is a defined contribution plan, such as a 401(k), in which multiple employers can participate. When employers join a PEP, they delegate their named fiduciary role to a third-party pooled plan provider (PPP).

What’s the difference between a PEP and a single-employer plan, like a traditional 401(k)?

PEP fiduciary oversight falls on the PPP rather than the employer. And although each PPP may set its own eligibility requirements, businesses joining a PEP benefit plan needn’t operate in the same industry or geographical area.

The SECURE Act

PEPs were introduced in the wake of the Setting Every Community Up for Retirement (SECURE) Act, passed in 2019. Prior to its passage, employers generally could only participate in multiple employer plans (MEPs) if they shared common factors (industry, geographical area, etc.) with other plan participants. Additionally, the Secure 2.0 Act of 2022, passed in December 2022, made some favorable changes to PEP participation.

Benefits of PEP plans

PEP plans provide viable 401(k) alternatives for small business owners who may otherwise struggle to compete for talent against large organizations with comprehensive benefits packages. Other advantages include:

Potential reduced fiduciary risk

Fiduciary oversight of a PEP generally falls on the PPP. However, employers must still take care in choosing a pooled plan provider to ensure it provides proficient plan administration and investment management and acts in the best interests of the plan participants.

Less in-house administration

The PPP assumes responsibility for much of the plan administration, handling all plan documentation, governmental filings and ongoing compliance. Employee payroll deductions are left to the employer, but these can be efficiently managed with the help of a payroll service provider that integrates payroll and benefits.

Tax credit opportunities

Tax credits can help offset PEP start-up costs. For the first three years of participation, employers may be eligible for a tax credit of $5,000 annually, with an additional $500 available to those who set up automatic enrollment. Under Secure Act 2.0, an additional credit of up to $1,000 per employee for eligible employer contributions may apply to employers with up to 50 employees for the preceding taxable year. This credit phases out from 51 to 100 employees.

Easier vendor relationships

Businesses participating in single-employer retirement plans (SEP) must independently communicate and coordinate with their recordkeeper, custodian, investment advisor, trustee and auditor. With PEP, all these tasks and services are bundled into one, saving employers time and money.

Frequently asked questions about pooled employer plans

Am I eligible for a PEP?

Businesses of all types and sizes can join a PEP. However, eligibility and acceptance criteria may vary between PPPs.

How do I know if a PEP is right for my business?

What’s right for one business may not be right for another. However, a PEP may be an excellent solution for small businesses that want to sponsor employee retirement benefits without the increased costs, logistics or risks associated with a traditional 401(k).