Long gone are the days when retirement plans could only be offered by big corporations. Thanks to Pooled Employer Plans (PEPs), retirement plans are more accessible than ever.
But what exactly is a Pooled Employer Plan?
These plans allow businesses to pool their resources in order to cut the start-up and administrative costs of retirement plans, making it more affordable than ever for businesses of any size to offer retirement benefits.
Add a Pooled Plan Provider (like peppermint) to the mix and you have an easy and affordable way to offer your employees a retirement plan. It’s something that can go a long way these days in increasing employee satisfaction (and therefore retention), as well as attracting top talent.
Have we got your attention yet?
In this article, we’ll take an in-depth look at:
- How the SECURE Act changed the way retirement plans are administered
- The differences between a PEP and a traditional 401(k)
- Different options for PEPs
- Cost of a PEP (and the tax credit you could get to help pay for it!)
- The benefits of PEPs and why having a retirement plan is crucial for your business’ success
Let’s jump in!
The SECURE Act was passed by Congress in 2019 and went into effect January 2021. There were a few changes to retirement plans in general, but most importantly for us, it softened the rules of who could join a Multiple Employer Plan, thus creating Pooled Employer Plans. It also increased the amount of tax credits a business owner could receive for offering a plan and setting up automatic enrollment.
Before the SECURE Act was put in place, only businesses with something in common, like working in the same industry, could form Multiple Employer Plans (MEPs). Now with the help of a Pooled Plan Provider (PPP) unrelated businesses can come together to offer easy and affordable retirement plans to their employees.
MEPs to PEPs
In a Multiple Employer Plan, there had to be a shared commonality between companies, like being part of the same industry. MEPs must have a sponsor that takes the fiduciary liability of the plan and takes care of the administrative duties. In a Pooled Employer Plan, this sponsor role would be assumed by a Pooled Plan Provider, like peppermint.
The SECURE Act also did away with the “bad apple” rule that stated all businesses involved could face adverse tax consequences if even one of the employers failed to meet the tax qualification rules for the MEP. This deterred many businesses from joining MEPs fearing they might get tangled up with a bad apple and pay the price.
Tax credits were increased as well, creating more incentive for business owners to offer a retirement plan, and additional credit is given if the automatic enrollment option is offered. Tax credits have the potential to cover up to 50% of fees for starting up the plan and educating employees about it (but more on that later).
On the surface, these changes may seem minor, but the SECURE Act removed some of the major barriers preventing businesses from offering retirement plans.
Traditional 401(k) vs PEP
401(k)s are by far the most well-known and popular type of retirement plan, but they also have a reputation for being complicated and costly to administer, not to mention the risk employers take on by sponsoring the plan. Pooled Employer Plans simplify 401(k)s and make them more accessible to businesses of all sizes.
From Pension Plans to PEPs
At the core of every PEP is a 401(k), but before we can understand how it came to be the most popular plan today we need to talk about the first retirement plan.
Before 401(k)s came on the scene in 1974, there was only one type of plan available to offer employees–pension plans.
This type of plan puts full responsibility on the employer to put money into the retirement plan. This tends to require a lot of time and resources to implement and ultimately isn’t always the most cost-effective option.
401(k)s put it in the hands of employees to decide how much out of their salary they want to contribute to the fund. This reduces the brunt of the responsibility for employers but also has its share of issues. Still, it’s easy to see how the 401(k) became the most widely offered plan by companies.
Retirement plans remained out of reach for small to medium-sized businesses, until the SECURE Act. The types of changes seen in the SECURE Act were years in the making and the creation of Pooled Employer Plans was something that many industries had pushed for.
PEPs make 401(k)s accessible to businesses of all sizes, and with the right Pooled Plan Provider it’s an easy way to offer retirement plans to your employees.
While 401(k)s can be complicated to administer, the overall concept is fairly straightforward.
The retirement fund is offered to employees with the company acting as the fiduciary. If employees choose to enroll, a portion of their compensation will be automatically put into the fund and they may make additional contributions if they choose, subject to annual limitations.
There are two types of 401(k)s: traditional and Roth. The key difference between the two is when the taxes are taken out on funds you put into the account.
With a traditional 401(k), funds are taken out of paychecks before income tax and employees pay the tax when they withdraw the money. With a Roth 401(k), funds are put into the account after tax and therefore can be withdrawn tax-free later on.
Contributions to the account are then distributed into different mutual or index funds that grow over time. Depending on the plan, there may be a default option with a pre-set mix of funds or there may be an option to put the contributions in a target-date fund.
A target-date fund takes into consideration an employee’s age for the ideal percentage of funds to put contributions in. Generally, the younger the employee, the more stocks will be invested in because there is more room for risk.
Whatever the case, employees always have full control of where their contributions end up.
Traditional 401(k) vs PEPs
The main difference between the two plans is the amount of companies allowed to contribute to the 401(k). In a traditional 401(k), companies have to go in on their own, while in a PEP a pool of businesses can contribute to the plan headed by one PPP, reducing costs and risk.
This is the most impactful difference as the provider takes care of all the details so you can stay focused on the big picture.
At peppermint, we take care of all the administrative duties, including filling out and filing required forms, managing vendors, and working with investment managers, as well as finding other companies to join the pool to further lower overall costs.
The chart below breaks down in more detail the key differences between offering a traditional 401(k) versus a PEP.
Pooled Employer Plans
Overall administrative and start-up fees are typically more expensive
Administrative and start-up costs are shared with other employers in the pool and therefore less costly
Employers act as the fiduciary and take on all the risk
Pooled Planned Providers (PPPs) are the fiduciaries and assume all the risk so participating employers don’t have to
Employer is responsible for set up, ongoing plan maintenance, managing vendors, etc.
PPPs take on all the behind-the-scenes work of managing vendors and finding other companies to join the pool
Employers are responsible for all administrative duties, including employee notifications
PPPs take care of all the administrative work, like filling out forms, and audits
When compared side-by-side, it’s clear that Pooled Employer Plans are one of the best ways to offer a 401(k) retirement plan.
The main difference between Pooled Employer Plan options is whether they offer safe harbor options or not.
Safe harbor plans allow employers to bypass IRS nondiscrimination testing, which if failed, could lead to costly penalties. By following the safe harbor framework, businesses can be assured that they are following all government requirements, thus avoiding fines.
Companies are required to immediately make contributions to employee retirement accounts that are vested, but for many small- to medium-sized businesses it’s well worth it.
At peppermint, there are a couple of different options to choose from when looking at Pooled Employer Plans. All of our plans come with the same great, base features. The different options just give you a little more flexibility in how you implement the plan.
Base Features include:
- Funds are invested in retirement plans before being taxed
- Ability to transfer funds from prior retirement accounts
- Flexible eligibility for enrollment
- Automatic enrollment options
- Access to borrow from retirement fund
- Ability to withdraw funds in an emergency
- Reduce employer’s taxable income
This option allows employers and participants to maximize contributions. Safe harbor options are available and employers match up to 100% on the first 4% of deferred compensation.
Similar to the Enhanced option, the Non-Elective option ensures that all employees receive retirement benefits. Three percent of employees’ compensation is automatically put into the fund whether they decide to contribute more or not. It also has a safe harbor option.
Since this option includes automatic enrollment, your business may qualify for additional tax credits.
This option is by far the most flexible, giving employers the ability to adjust contributions to employee retirement funds as business needs change. This option is subject to testing and costs an additional $1000 annually.
Costs of PEPs
Depending on the Pooled Plan Provider, prices of a PEP plan will vary but one thing is certain–administrative and start-up costs will be less than if you were to go it alone.
With peppermint, employers pay a one-time set-up fee of $750, and $1000 annually. Participants pay $8 per month and .25% on contributions.
As stated above, the Discretionary plan does cost an additional $1000 annually due to the testing and evaluations that go along with an employer directed plan.
One of the new incentives brought in by the SECURE Act was increased tax credits.
Tax credits directly reduce your total tax on a dollar-to-dollar basis, whereas tax deductions only reduce the amount of your taxable income. In other words, tax credits save you the full amount and tax deductions only save you a percentage.
The IRS states that businesses may qualify if:
- Your business employs 100 or fewer workers who have received at least $5000 in compensation for the preceding year
- There is at least one plan participant who is a Non-Highly Compensated Employee (NHCE)
- A Highly Compensated Employee is defined as someone who owns more than 5% of the company regardless of how much they are compensated, someone who receives $125,000 in compensation ($130,000 if the year was 2019 or 2020), or an employer can choose to include the top 20% of earners.
- In the past three years, your business has not offered a similar retirement plan to approximately the same number of employees
Amount of Tax Credit
This incentive is directed at the initial cost of setting up the retirement plan. A business owner can receive up to 50% of eligible costs of either $500, or $250 multiplied by the number of eligible NHCEs up to $5000 for the first three years of the plan.
You can receive additional credit for offering automatic enrollment, approximately $500 for the first three years you offer this option.
For peppermint clients, this would be the Non-Elective option.
Reporting the Credit
Both of these credits can be calculated and claimed using Form 8881. From there, based on the structure of your business, you will need to report the credit through one of two forms.
If your business is a partnership or S corporation (defined by the IRS as a “corporation that elects to pass corporate income, losses and deductions and credits through to their shareholders for federal tax purposes”), you will need to report through Schedule K.
All other businesses may report on Form 3800, Part III, first line.
Benefits of Adding A Retirement Plan
With the job market as competitive as it is, companies are scrambling to find ways to increase recruitment and retention. Adding a retirement plan to your compensation package is a great place to start.
Having an overall good compensation package can be the deciding factor between a potential candidate choosing to work for you or turning you down for another company.
It could even be the deciding factor for your current employees. According to a survey by Betterment, as many as 74% would leave their current employer for one with better financial benefits.
With such high stakes, it’s more than worth investing in a retirement plan for your company–and Pooled Employer Plans make it easier than ever for businesses of all sizes to offer retirement benefits.
With less risk, administration, and costs, it’s worth looking into. Get in touch with a peppermint advisor to see if a PEP is right for you.