Multiple Employer Plan 401(k)
Written by True Tamplin, BSc, CEPF®
Updated on November 8, 2021
There is a type of retirement plan arrangement known as a Multiple Employer Plan (MEP), where two or more employers pool their resources to establish a single defined benefit or defined contribution plan for their employees.
If they use a 401(k) plan, then employees from all participating employers can make contributions up to the maximum possible amount prescribed by the IRS for that year.
All MEPs are run by a MEP sponsor that administrates the plan and assumes fiduciary responsibility for the plan.
All employers that join the plan are known as “adopting employers”.
Types of MEPs
There are three types of MEPs in the marketplace today, broken down as follows:
1. Closed MEP – This type of MEP is made up of multiple unrelated employers that have employees and a sponsor that is a bona fide group, association, or organization with which member employers share a nexus or interest other than the retirement savings plan. In order to participate in the plan, an employer has to be a bona fide member of this group. All employers that are members of the group must have the authority to make plan decisions.
2. Association Retirement Plan – This type of MEP is more relaxed than the closed MEP. It allows employers in related or unrelated industries that share a common geographic area such as a state or region to form a MEP. Companies that are in the same industry as other members of the MEP can also join even if they are not within the prescribed geographic region.
3. Open MEP – This is where members of the MEP have no common characteristics and don’t have to be located in the same geographic region. The retirement plan itself is the only thing that they have in common.
Types of MEPs
MEPs can be sponsored by any of the following entities:
- A board of directors – The directors are appointed by the adopting employers to sponsor the plan and also appoint and monitor plan fiduciaries.
- Co-sponsorship – Each adopting employer is a co-sponsor of the plan. This arrangement is sometimes combined with a board of directors so that the adopting employers can maintain firm control of the plan.
- A trade or industry group – ERISA allows each of these to be considered an employer that is eligible to sponsor a MEP. This includes local organizations such as a Chamber of Commerce.
- A third party – A professional employer organization (PEO) or a similar professional provider assumes the responsibility of performing various types of management duties such as payroll, workers’ compensation, and training.
Multiple Employer Plan vs. Multi-Employer Plan
Despite the similarity in their names, these are two separate programs.
Multiple employer plans are sponsored by at least two unrelated employers.
The plan is considered to be a qualified plan under ERISA guidelines and must adhere to all rules outlined in IRC section 413(c).
A multi-employer plan is a collectively bargained plan between multiple employers, usually within the same or related industries, and a labor union.
Multiemployer plans are often referred to as Taft-Hartley plans, and they must comply with IRC section 414(f).
MEPs are ultimately a method used to provide a retirement savings plan to employees of businesses that do not have the resources to offer a separate plan by themselves.
Under the MEP arrangement, employers can share the burden of offering and administrating the plan.
It is possible for someone to participate in more than one 401(k) plan, but the contribution limits apply to the individual person, not the plan.
This means that in 2020, an employee under age 50 who participates in two 401(k) plans could not contribute more than a total of $19,500 between the two plans.
He cannot contribute $19,500 to one plan and then make a separate contribution of the same amount to the other plan.
The total amount of contributions cannot equal more than the aggregate contribution limit as set by the IRS in a given year.
If the employee quits working for one of the employers, he or she may be able to roll his or her 401(k) plan with that employer over to the other plan in which he or she is participating.
Contribution limits do not include rollover amounts, so this would not affect the amount that the employee could contribute to the remaining plan for that year.
Multiple Employer Plan 401(k) FAQs
What Is a 401(k) Plan?
401(k) Meaning
The 401(k) retirement savings account got its name from the Revenue Act of 1978, where an addition to the Internal Revenue Services (IRS) code was added in section 401(k).
Consequently, 401(k) does not stand for anything except for the section of IRS tax code it was created in.
Traditional 401(k) vs Roth 401(k)
There are two types of 401(k) plans: Traditional and Roth 401(k)s.
The traditional 401(k), named after the relevant section of the IRS code, has been around since 1978.
With this plan, any contributions you make to the 401(k) account will reduce your income taxes for that year and will be taxed when they are withdrawn.
Roth 401(k)s, named after former senator William Roth of Delaware, were introduced in 2006.
Unlike a traditional 401(k), all contributions are made with after-tax dollars and the funds in the Roth 401(k) account accrue tax free.
Typically, employees can take advantage of both plans at the same time, which is recommended among financial advisors to maximize retirement savings.
Because of the way the contribution limits work, it is possible to invest different amounts into each account, even year-to-year, so long as the total contribution does not exceed the set limit.
Contributing to Your 401(k) Retirement Plan
Contributing to a 401(k) plan is traditionally done through one’s employer.
Typically, the employer will automatically enroll you in a 401(k) that you may contribute to at your discretion.
If you are self-employed, you may enroll in a 401(k) plan through an online broker, such as TD Ameritrade.
If your employer offers both types of 401(k) accounts, then you will most likely be able to contribute to either or both at your discretion.
To reiterate, with a traditional 401(k), making a contribution reduces your income taxes for that year, saving you money in the short term, but the funds will be taxed when they are withdrawn.
With a Roth 401(k), your contributions can be made only after taxation, which costs more in the short term, but the funds will be tax free when you withdraw them.
Because of this, deciding which plan will benefit you more involves figuring out in what tax bracket you will be when you retire.
If you expect to be in a lower tax bracket upon retirement, then a traditional 401(k) may help you more in the long term.
You will be able to take advantage of the immediate tax break while your taxes are higher, while minimizing the portion taken out of your withdrawal once you move to a lower tax bracket.
On the other hand, a Roth 401(k) may be more advantageous if you expect the opposite to be true.
In that case, you can opt to bite the bullet on heavy taxation today, but avoid a higher tax burden if your tax bracket moves up.
Check out this article from Forbes to see the IRS tax rate tables for 2020, but remember that they are subject to change.
A smart move may be to hedge your bets and divide your contributions between the two types of IRAs.
If your employer allows you to add funds to both a traditional and Roth 401(k), then doing so reduces the potential risks of each.
In this case, you will also have the ability to decide what proportion of your income goes into each account, meaning that as you near retirement and have a clearer idea of what position you will be in, you can put more into one or the other.
When you do decide which avenue to take, make sure to thoroughly evaluate your decision.
Moving funds from one account to another, such as from a traditional to a Roth 401(k), is time consuming and expensive, if even possible.
Likewise, transferring a 401(k) from one employer to another in the event of a job change is also tricky.
You want to make sure that when you put money into your plan, it will be able to sit undisturbed for a very long time.
Pension vs 401(k)
Pensions are similar to a 401(k), but are a liability to a company.
If an employer offers an employee a pension, it means that they are promising to pay out a set amount of money to the employee at the time of their retirement.
There is typically no option to grow this amount, but it also does not require any financial investment from the employee.
Pensions, also referred to as defined-benefit plans, are becoming increasingly rare because it puts the financial burden of offering a retirement fund for employees entirely on the employer.
401(k)s, which are also called defined-contribution plans, take some of the financial pressure off of an employer, while also allowing employees to potentially earn a larger retirement package than they would have with a pension.
How Much Should I Contribute to My 401(k)?
Most financial experts say you should contribute around 10%-15% of your monthly gross income to a retirement savings account, including but not limited to a 401(k).
There are limits on how much you can contribute to it that are outlined in detail below.
There are two methods of contributing funds to your 401(k).
The main way of adding new funds to your account is to contribute a portion of your own income directly.
This is usually done through automatic payroll withholding (i.e. the amount that you wish to contribute, counting all adjustments for taxation, is simply withheld when receiving payment and automatically put into a 401(k)).
The system mandates that the majority of direct financial contributions will come from your own pocket.
It is essential that, when making contributions, you consider the trajectory of the specific investments you are making to increase the likelihood of a positive return.
The second method comes from deposits that an employer matches.
Usually employers will match a deposit based on a set formula, such as 50 cents per dollar contributed by the employee.
However, employers are only able to contribute to a traditional 401(k), not a Roth 401(k) plan.
This is especially important to keep in mind if you want to utilize both types of plans.
A key variable to keep in mind is that there are set limits for how much you can add to a 401(k) in a single year.
For employees under 50 years of age, this amount is $19,500, as of 2020. For employees over 50 years of age, the amount is $25,000.
If you have a traditional 401(k), you can also elect to make non-deductible after-tax contributions.
The absolute limit, counting this choice and all employer contributions, is $57,000 for employees under 50, and $63,000 for those over 50 as of 2019.
Plan in Advance
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401(k) Plan FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.