Should Your Business Consider a Pooled Employer Plan (PEP)?

What is a pooled employer plan (PEP)?

A PEP is a defined contribution plan for retirement, but rather than the company operating as the plan sponsor, multiple employers participate. Administrative and fiduciary duty falls to the pooled plan provider, rather than the employer.

Who qualifies for a pooled employer plan?

A business of any size, industry, or location in the U.S. can be a part of a pooled employer plan. However, each provider has their own eligibility requirements. You’ll need to do research to determine which pooled plan provider is the best fit for you.

What are the benefits of a pooled employer plan (PEP)?

PEP administrator covers Employee Benefit Plan audits

Typically (as of 2023), plans with more than 100 participants are required by law to perform an Employee Benefit Plan audit on an annual basis. This audit generally falls to the company to facilitate — a costly investment requiring work from multiple departments and third-party partners, like an independent auditor.

However, with a PEP, that audit becomes the responsibility of the PEP administrator — not the employers, no matter how many employees each company has on the plan.

This is perhaps the biggest benefit of a PEP, saving the employer thousands of dollars in audit fees.

Cost savings

Employer-sponsored plans come with high administrative costs, a potential obstacle for small businesses. But with a PEP, the plan provider assumes administrative tasks, including documentation, filings, and compliance. The only task that employers are still responsible for are employee payroll deductions.

This administrative cost is split among employers participating in the pooled plan, potentially providing cost savings to employers.

Reduction of fiduciary risk

With an employer-sponsored plan, the employer maintains fiduciary responsibility — and fiduciary risk. However, with a PEP, that duty falls to the plan provider.

However, that doesn’t mean you as the employer can forfeit your due diligence. As a plan participant, you will still need to monitor the plan provider to ensure they are making sound decisions that are in the best interests of your employees.

Potential tax credits

Who doesn’t love a tax credit?

Just like with SEPs, you can claim available tax credits for offering your employees a retirement plan.

The IRS explains the credit amount as follows:

“The credit is 50% of your eligible startup costs, up to the greater of:

• $500 or
• The lesser of:
  • $250 multiplied by the number of NHCEs who are eligible to participate in the plan,
  • or $5,000.”

Eligible startup costs are defined as the cost to set up the plan, as well as the cost to educate your employees about the plan. This credit can be claimed for the first three years of the plan.

But not all employers can claim this credit. You must be a small business with under 100 employees, with at least “one plan participant who was a non-highly compensated employee (NHCE),” and you cannot have previously offered a retirement plan to employees in the three prior tax years.