Bill would let 403(b)s use PEPs
There could be even more demand for pooled employer plans from nonprofit organizations than from the for-profit side
Nonprofits and colleges would be able to join the SECURE Act’s much-anticipated pooled employer plans under a bill introduced last week by Rep. Ron Kind, D-Wis.
If the bill passes, it will be very big news for any business that is lining up to become a pooled plan provider. There is expected to be a flood of applications for that status, once the Department of Labor finalizes its criteria for those plan providers.
The first PEPs would be able to launch next year and would be open to 401(k) plans operated by for-profit organizations. While plan providers are eager for what they anticipate will be a large amount of business in that area, 403(b)s could represent an even greater opportunity.
The SECURE Act established a legal framework for PEPs, pooled retirement plans that do not require participating employers to have any common connection, unlike the requirements for multiple employer plans.
“The demand there is larger than it is on the for-profit side of the house – more than 401(k)s,” said Terry Power, president of The Platinum 401(k).
That is because of the potential reduction in fiduciary liability that 403(b) sponsors could see under such arrangements — a big concern, given the volume of excessive-fee lawsuits filed against colleges and universities over the past five years, Power said. His firm would seek to operate 403(b) PEPs if the legislation passes, with those plans potentially available as soon as 2022, he said.
Another factor in that demand is that 403(b)s generally don’t have the same ability to participate in MEPs that 401(k) sponsors do. The IRS doesn’t provide a way for nonprofits to form or participate in MEPs, though some 403(b) plans that are modeled similarly to MEPs do exist, Power said.
Another facet of the House bill would address the 403(b) MEPs that already exist.
Such plans are common among small school districts that share a single MEP within a state, said Bob Toth, principal of Toth Law, who participated in discussions of the legislation’s design.
Currently, all districts that participate in such plans must file their own Form 5500 with the DOL, which puts the plans on awkward footing, he noted. The status of those plans can be threatened if a single district is out of compliance or doesn’t file a form – the same “one bad apple” rule that has affected 401(k) MEPs. The House bill would address that, requiring only a single Form 5500 for an entire plan, Toth said.
“It solves a very big problem that 403(b) MEPs have,” Toth said. “It covers those that aren’t traditional MEPs, who are in unusual arrangements.”
The bill is dubbed the Savings for All Vocations Enhancement, or SAVE, Act. It is cosponsored by Rep. Mike Kelly, R-Pa., and Rep. Jason Smith, R-Mo.
The legislation would also provide incentives for S corporations to convert to employee stock ownership plan structures and change the penalties imposed on IRA holders, such as reducing excise taxes for failing to take required minimum distributions.
For reprint and licensing requests for this article, click here