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Tax Reform Surprise: Congress Slips in 401k MEP Broadside

Tax Reform Surprise: Congress Slips in 401k MEP Broadside
November 07
00:42 2017

Buried deep within H.R.1 of the first session of the 115th Congress of the United States of America, (a bill known by the Short Title as the “Tax Cut and Jobs Act,” a.k.a. “The Tax Reform Bill of 2017”), beginning on line 17 of page 148, resides a little reported change to Section 401 of the U.S. Code. You might know subsection (k) of Section 401 by its more popular name “401(k).” H.R.1 introduces a brand-new subsection to Section 401 – subsection (o). Within this new subsection resides language that just may change the nature of the retirement plan industry.

The proposed new 401(o) subsection is titled “Special Rule for Applying Non-Discrimination Rules to Older, Longer Service and Grandfathered Participants.” Further down, specifically on Page 157, line 10 of H.R.1, sits paragraph 401(o)(1)(H). It reads as follow: “(H) TREATMENT AS SINGLE PLAN.—For purposes of subparagraphs (E) and (G), a plan described in section 413(c) shall be treated as a single plan rather than as separate plans maintained by each participating employer.”

For those keeping score, Section 413(c) of the U.S. Code refers to “Plans Maintained by More than One Employer.” In other words, Multiple Employer Plans of “401k MEPs.”

While Section 413(c) permits employers to combine their individual 401k plans under one common 401k MEP, the Code leaves it to the Secretary of Labor to determine the exact rules under which 401k plans could be created. In response to an inquiry made by TAG Associates, LLC, the DOL issued an Advisory Opinion on May 25, 2012 (for more on this, see “Experts Sound Off on DOL’s 401k MEP Advisory Opinion,”, June 12, 2012). DOL Advisory Opinion 2012-04A effectively halted the burgeoning “Open 401k MEP” market. (“Closed” 401k MEPs continue to flourish, by their use is limited to business associations with demonstrated “commonality” among members.)

For those who are counting on open 401k MEPs to open the floodgates to allow smaller employers to reap the benefits of low cost, professionally managed, 401k plans, paragraph 401(o)(1)(H) is great news. According to long-time 401k MEP advocate Terrance P. Power, it’s “Huge news.” Power, President of The Platinum 401k, Inc. in Clearwater, Florida, has appeared before Washington legislators explaining how 401k MEPs help small business owners and employees. Of line 10 on page 157 of H.R. 1, he says, “This language effectively kills the 2012 Advisory Opinion.” He also says we should “expect to see that section expand in the final mark up to include PEPs, PPPs, etc.”

The 3 Reasons Why Small Employees Want 401k MEPs

There’s no question 401k MEPs represent one of the best kept secrets in the retirement plan industry. Because of the DOL’s 2012 Advisory Opinion, they have very little practical use, as they are generally limited only to company belonging to business associations.

This does not diminish their attractiveness, and it’s often in the best interests of its members that business associations find a way to offer 401k MEPs. It’s also in the best interests of business associations to offer them, as 401k MEPs can both help increase membership as it’s an attractive benefit, as well as act as a valuable revenue stream for the organization if that organization chooses to act as the trustee of the 401k MEP.

Focusing on the individual companies that comprise the 401k MEP, three motivating reasons cause employers to aggressively pursue the 401k MEP option:

  1. Reduced Fiduciary Liability: While one can never fully eliminate the underlying company’s fiduciary liability, fully delegating the delivery of the retirement plan benefit to an able third party can remove substantial fiduciary liability. The 401k MEP’s plan sponsor now assumes the bulk of the fiduciary liability as that plan sponsor is solely responsible for selecting and monitoring plan service providers. (Executives of the underlying companies may continue to have fiduciary liability for the selection of the 401k MEP provider, though.) Most importantly, since, ideally, the 401k MEP is treated as a single plan, the underlying companies do not have to file individual 5500 reports.
  2. Economies of Scale Benefits: By pooling retirement plan assets from many companies, the 401k MEP aggregate becomes significantly larger than any underlying company can expect to be. This largess opens doors to fee breaks as well as potentially higher quality service providers. This means employees benefit from keeping more of the plans investment growth (because the plan pays lower fees), among other things.
  3. Frees Up Time of Key Personnel: Without the need to organize, monitor, and maintain the firm’s retirement plan, company executives can now focus exclusively on matters that have a greater impact on increasing revenues and profits. This should always be the exclusive focus of executives. Unfortunately, and this impacts smaller firms most acutely, by offering a retirement plan, these executives find they’re spending more and more hours working for the plan, and less and less hours growing the business.

The DOL’s 2012 Advisory Opinion meant it would no longer recognize open MEPs. As a result, the DOL nullified at least two of these three reasons. By requiring plans in 401k MEPs to be treated as individual plan sponsors, the DOL immediately brought back most of the fiduciary liability. It even required each company to file individual 5500 plans. Furthermore, this increased the workload on the executives of those underlying companies. Arguably, by requiring individual companies to purchase their own ERISA bond, plan costs nudged up, too. All in all, the 2012 Advisory Opinion killed the 401k MEP outside of the business association setting.

Congress, through the language in H.R.1, just changed all that. “The proposed language in the Tax Bill will effectively negate the authority behind the Department of Labor’s Advisory Opinion 2012-04(a) by acknowledging that the adopters within a 413(c) Multiple Employer Plan are not to be separated out with individual filing responsibilities,” says Power. “This means that the current requirement for Open MEPs that include individual Form 5500s, individual plan audits for those adopters whose plan makes such an audit a requirement, and the need for an individual ERISA Bond will disappear under the proposed law.”

This isn’t to say the 401k MEP has been completely unshackled. After all, H.R.1 remains just a bill. There’s a lot more wordsmithing to go before it becomes a law. “We expect that the language in the bill will be expanded over the next week or so to reflect the desire to see the implementation of Pooled Employer Plans, clarification about who can be a Pooled Plan Provider, and the elimination of the liability of one adopting employer for the actions of another (the ‘one bad apple’ issue),” says Power.

For all the talk and concern about Congress cutting the contribution caps for 401k plan, the real news appears to be just the opposite. Sometimes, it’s better to wait for the final result rather than get worked up about what you think may happen. “Laws and sausage should never be watched being made. Tax laws even more so,” says Power. “The bipartisan nature of the interest to expand multiple employer plans cannot be overstated, however. If the Congress is able to get a bill through both legislative chambers and onto the President’s desk, multiple employer plans will be included. And it will be a game changer for the smaller end of the marketplace. Stay tuned.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Charles Storke
    Charles Storke November 07, 12:00

    Your cautionary observations in the last paragraph of your piece are well taken. Especially since the proposed new subsection (o) only applies to non-discrimination testing under section 401(a)(4) and 410(b) for certain existing closed defined benefit plans and it is within that context that the language you cite regarding Code section 413(c) comes into play. In particular, for purposes of determining whether there’s been a substantial increase in benefits or coverage of the closed plan. Also, to get where Open MEPs want to go, not only would there have to be a much broader change in Code section 413(c), there would also have to be amendments to Title I of ERISA, which governs how the DOL treats Open MEPs, including whether they can file a consolidated Form 5500.

    I haven’t read the entirety of HR1 but my cursory scan did not turn up any such ERISA changes, which makes sense since this is the Ways and Means Committee and a tax bill, whereas Title I of ERISA falls within the purview of the EdWorkforce Committee in the House.

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