Small Business 401(k)s and the Impact of the DOL’s Multiple Employer Rule

Welcome, dear reader. I imagine you're here because you either own a small business or are employed by one. Or perhaps you're an independent contractor, working tirelessly for your clients, but haven't yet made provisions for your golden years. Just like 38 million others in the United States, you may lack access to a retirement plan at your workplace.

If that's the case, this piece of information might interest you. In the latter half of 2019, a new rule introduced by the U.S. Department of Labor (DOL) threw open a host of opportunities for small and medium businesses, as well as for individuals like yourself. Now, this may sound like a lot to take in. But don't worry, I'm here to break it all down for you. Let's get started.

An Overview

Retirement planning, especially for small businesses, is a nuanced topic. A 401(k) plan has always been a popular choice for large corporations. It's a tax-advantaged, defined-contribution retirement account that employers can offer their employees. However, for small businesses and self-employed individuals, setting up a 401(k) hasn't always been easy due to the costs and complexities involved.

Recognizing this challenge, the DOL, on September 30, 2019, implemented a rule that could significantly change how small businesses approach retirement planning. It's all about encouraging multiple employer plans (MEPs) and introducing what's called an Association Retirement Plan (ARP). This rule aims to help smaller companies and self-employed individuals have the same access to retirement plans as their larger counterparts.

As a small business owner, it's worth understanding that these ARPs are a specific form of MEP. They open up an opportunity to band together with other small businesses to offer retirement benefits in a cost-effective manner. This can be a game-changer, making retirement benefits accessible for millions who don't have it yet.

Personal Anecdote

Let me share with you a personal experience. I run a small digital marketing agency. Despite a decent turnover and a dedicated team, providing a retirement plan was always a challenge for me. When the new DOL rule came into effect, I was able to join hands with a few other businesses in my city to set up an ARP. Not only has this allowed me to offer a competitive benefits package, but it also helped me attract and retain better talent.

So, if you've been wondering about retirement planning for your business or for yourself, this is the right place to begin.

In the next part of our discussion, we will delve deeper into the Association Retirement Plan (ARP) and the DOL Multiple Employer Rule. We'll explore what exactly an ARP is, how the DOL rule simplifies the process of setting up a retirement plan for small businesses, and we'll shed light on the crucial interpretation of the Employee Retirement Income Security Act (ERISA) of 1974 that led to the creation of this rule.

Stay tuned to gain a comprehensive understanding of how the DOL rule impacts your small business or self-employment journey and what it means for your retirement planning strategy.

Understanding the Association Retirement Plan (ARP) and the DOL Multiple Employer Rule

We left off in our previous discussion with an introduction to the DOL's new rule effective from September 30, 2019, which makes it easier for small businesses and self-employed individuals to access retirement plans. In this section, we'll delve into what this rule means in practice and how the Association Retirement Plan (ARP) and the DOL Multiple Employer Rule could impact you and your business.

Explaining the ARP

An Association Retirement Plan (ARP) is essentially a new type of Multiple Employer Plan (MEP). Prior to the DOL rule, MEPs were available only to employers with a common interest, such as businesses in the same industry. Now, under the ARP, any small business can band together with others, regardless of their industry or geographic location, to offer retirement benefits.

This arrangement offers several benefits. For starters, it spreads the administrative burden and costs over more participants, thus making retirement plans more affordable and less of a hassle for small businesses.

How the DOL Rule Eases the Process

The Department of Labor's Multiple Employer Rule significantly streamlines the process for small businesses to offer retirement plans. Before this rule, smaller businesses often struggled with the complexities of administering a 401(k) plan, not to mention the prohibitive costs.

With the advent of the ARP, businesses can share these administrative duties and costs. It's akin to buying in bulk—when many businesses join hands, costs go down, making the retirement plan affordable to all.

When I first learned about ARPs, I was running a small consulting firm with just a handful of employees. The idea of being able to offer them a retirement plan was exciting, but also daunting due to the perceived complexities and costs. The ARP provided an opportunity to collaborate with other businesses and offer a 401(k) plan at a fraction of the cost, making the once-daunting task quite feasible.

Unpacking ERISA and Its Interpretation

To understand the genesis of this rule, we need to go back to the Employee Retirement Income Security Act (ERISA) of 1974. ERISA is a federal law designed to protect retirement assets of Americans by implementing rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets.

The DOL's new rule leverages an interpretation of ERISA to widen the access to MEPs and introduce ARPs. By redefining who can establish a MEP, the DOL opened up a pathway for more businesses and self-employed individuals to offer retirement plans.

Limitations of ARP and Differences from “Open” MEPs

While ARPs represent a significant step forward, they do have certain limitations. They still require a connection or “commonality” among employers, though it's far less restrictive than before. This connection could be geographic, with businesses operating in the same city or state, or it could be that they are part of the same industry or professional association.

This is where “open” MEPs differ. Under the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019), employers don't need to share any commonality to participate in an “open” MEP, thereby increasing the pool of potential participants.

We've covered a lot of ground today, delving into the intricacies of the DOL's Multiple Employer Rule and ARPs. But our journey is far from over. In the next section, we will explore who can offer and administer an ARP. We will define the role of a “bona fide” group or association and highlight examples. We'll also look at the responsibilities of a Professional Employer Organization (PEO), their qualifications, and who counts as a Qualified Self-Employed Working Owner.

So, buckle up for another round of enlightening information on your path to more accessible retirement planning.

Who Can Offer and Administer an Association Retirement Plan (ARP)?

As we continue our journey of understanding the Department of Labor's Multiple Employer Rule and Association Retirement Plans (ARPs), we are now stepping into the landscape of who can offer and administer an ARP. We will be looking into the roles of “bona fide” groups, the involvement of Professional Employer Organizations (PEOs), and how self-employed workers can benefit from this plan.

Defining a “Bona Fide” Group

A bona fide group or association, in terms of an ARP, refers to a legally distinct entity with members that have a common business interest or operate in a common geographic area. This group takes up the role of sponsoring the ARP, which includes tasks such as setting up the plan, sourcing providers, and monitoring performance. It’s important to note that the “bona fide” group or association should exist for a reason other than merely offering an ARP.

A few years ago, I joined a local business association, which was primarily a networking and knowledge-sharing platform. It later became a “bona fide” group offering an ARP, adding another layer of value to my membership.

Examples of “Bona Fide” Groups

Typically, “bona fide” groups or associations could include local chambers of commerce, trade associations, or professional bodies. In my case, the association was composed of local businesses across various sectors. By becoming a “bona fide” group, they made retirement planning accessible and affordable for all members, including myself.

Role of a Professional Employer Organization (PEO)

A Professional Employer Organization (PEO) is a firm that provides comprehensive HR solutions to small and medium-sized businesses. These services often include payroll, benefits, tax administration, and regulatory compliance assistance.

PEOs can sponsor an ARP, given they meet certain “bona fide” conditions. They must have substantial control over the functions and activities of the ARP, act directly in the interest of the participants and beneficiaries for the purpose of providing benefits, and have commonality and control over the employer members.

My business engaged with a PEO a few years ago to handle HR tasks. When they introduced the concept of an ARP, it streamlined the process of providing retirement benefits to my employees and took one more responsibility off my plate.

Participation of Qualified Self-Employed Working Owners

Qualified Self-Employed Working Owners (QSEWOs) are individuals who own and work in their own trade or business, earning wages or self-employment income. They are eligible to participate in an ARP.

As a self-employed consultant, the idea of joining an ARP was a game-changer. It provided an opportunity to contribute towards my retirement, while also freeing up my time to focus on growing my business rather than navigating the complex terrain of retirement planning.

We have now covered who can offer and administer an ARP, which provides a solid base for understanding how ARPs function. But our exploration is not over. In our next section, we will delve into the impact of the SECURE Act on ARPs. We will shed light on the ‘open' MEPs, the abolishment of the “one bad apple rule,” and the implications for employers. So, stay tuned as we continue to unravel the ins and outs of retirement planning for small businesses and self-employed individuals.

The Impact of the SECURE Act on ARPs

As we continue our in-depth exploration of Association Retirement Plans (ARPs) and the DOL's Multiple Employer Rule, it's crucial to understand how this landscape has been affected by the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

The SECURE Act: Broadening Access to MEPs

The SECURE Act, enacted in December 2019, came as a significant boon to small businesses and self-employed individuals like myself. Among its many provisions aimed at enhancing the retirement security of Americans, the SECURE Act further broadens access to Multiple Employer Plans (MEPs) for unrelated employers.

Before the Act was passed, my small consulting firm was hesitant about offering retirement plans due to the costs and administrative challenges. The SECURE Act changed this by making it easier and more affordable for businesses like mine to join a MEP.

Introduction of “Open” MEPs

One significant change brought by the SECURE Act is the creation of “open” MEPs, also known as Pooled Employer Plans (PEPs). Previously, the DOL rule required employers participating in a MEP to share a common business interest or geographic location. However, the SECURE Act removed this restriction, enabling unrelated businesses to join together in a PEP.

Upon hearing this news, I felt a great sense of relief. This meant my business could join a retirement plan with other companies, irrespective of their industry or location. It allowed us to share costs, lower investment fees, and reduce our fiduciary liability.

Abolishment of the “One Bad Apple Rule”

The SECURE Act also abolished the “one bad apple rule”. This rule stated that if one employer in a MEP failed to meet plan requirements, the whole plan could be disqualified. The SECURE Act has put the minds of small business owners at ease by eliminating this rule.

I recall my concern about the “one bad apple rule” when considering joining a MEP. The potential of my employees' retirement security being jeopardized due to the actions of an unrelated business was a significant risk. Its removal made the decision to join a MEP a much safer and attractive option.

The SECURE Act has had a significant impact on the landscape of ARPs and MEPs. It has opened new opportunities for small businesses and self-employed individuals to offer retirement benefits to their employees.

However, navigating these changes can be complex, and making informed decisions is crucial. In our next and final section, we'll provide tips on identifying potential organizations for joining ARPs, the advantages of hiring a PEO, and considerations while joining an ARP. We'll also discuss some potential non-ARP alternatives, ensuring you're fully equipped to make the best decisions for your business's retirement planning needs.

Next Steps and Considerations

As we close this comprehensive discussion on Small Business 401(k)s, the Multiple Employer DOL Rule, and the subsequent impact of the SECURE Act, it's essential to step back and consider the way forward. In this final section, we'll explore some practical steps to leverage these new opportunities, as well as the importance of prudence and due diligence in navigating the retirement planning landscape.

Identifying Potential Organizations for Joining ARPs

One of the first things to consider is identifying potential organizations for joining an Association Retirement Plan (ARP). While my personal journey led me to join an industry-specific association, the right fit for you could be different. Look for well-established groups or associations that have a strong track record and are known for their commitment to their members. I also suggest researching groups with a robust administrative setup and experience in managing retirement plans.

Advantages of Hiring a PEO

Hiring a Professional Employer Organization (PEO) can be a significant advantage for small business owners like us. I remember when I first contracted a PEO for my company. The PEO provided not only administrative relief but also valuable guidance in setting up and managing our ARP. They took on much of the responsibilities related to the retirement plan, allowing me to focus on growing my business.

Caution and Considerations

While ARPs offer a promising solution to small businesses and self-employed individuals for offering retirement plans, they are not without potential pitfalls. Joining an ARP requires due diligence. I found it essential to understand the administrative costs, potential liability, and obligations associated with participating in an ARP.

Exploring non-ARP alternatives can also be beneficial. For instance, my friend, a fellow entrepreneur, found a Simple IRA more suitable for her micro-business. Other options could include Solo 401(k) plans or SEP IRAs, especially for self-employed individuals.

Recap and Conclusion

This series began by highlighting the need for small businesses and self-employed individuals to have access to a retirement plan. We discussed the U.S. Department of Labor's rule effective from Sept. 30, 2019, and how it impacts us. Through the lens of my personal experience, we dove into the intricacies of the Association Retirement Plan (ARP) and how the DOL rule made it easier for small businesses like mine to offer retirement plans to our employees.

We also explored the role of “bona fide” groups or associations and Professional Employer Organizations (PEOs) in offering and administering an ARP. Furthermore, we analyzed the impact of the SECURE Act, its role in enhancing access to MEPs for unrelated employers, and the abolishment of the “one bad apple rule”.

Finally, we addressed the key considerations when taking the next steps. Hiring a PEO, identifying potential organizations for joining ARPs, and due diligence while joining an ARP are all part of this complex yet rewarding journey.

As a small business owner myself, the complexity of offering a retirement plan can seem daunting. Yet, the potential benefits of the DOL rule and the subsequent SECURE Act have made it a viable and attractive option. Exploring these options, understanding their implications, and making informed decisions can open new avenues for providing retirement benefits to our employees, securing their future, and enhancing our businesses' attractiveness.

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