MEP or MESS?

Good afternoon to all,

We have virtually no experience with MEPs.  We have a client who owns two separate businesses and maintains a 401(k) plan for each business.  One has well under 100 employees and one is dangerously close to needing an independent audit.

There is a new investment advisor to the plans and she is wanting to create a MEP out of the two plans, claiming that there will be lower fees from the recordkeeper if they become a MEP.

My question is this:  Is this potential new MEP considered one plan with one 5500 to file, and will it now be thrust into the category where it needs an independent audit because it will have over 100 participants with the two companies combined?

Your advice is greatly appreciated.

Honest question, if you can't answer basic MEP questions, should you even consider creating a MEP situation for this client?

On ‎10‎/‎17‎/‎2018 at 6:50 PM, ldr said:

Good afternoon to all,

We have virtually no experience with MEPs.  We have a client who owns two separate businesses and maintains a 401(k) plan for each business.  One has well under 100 employees and one is dangerously close to needing an independent audit.

There is a new investment advisor to the plans and she is wanting to create a MEP out of the two plans, claiming that there will be lower fees from the recordkeeper if they become a MEP.

My question is this:  Is this potential new MEP considered one plan with one 5500 to file, and will it now be thrust into the category where it needs an independent audit because it will have over 100 participants with the two companies combined?

Your advice is greatly appreciated.

Without getting into the issue of controlled groups which you left out (you didn't tell us the relationship between the companies, something that is probably an important thing to include......) consider splitting the plan that is getting close to 120 people into TWO identical plans except for eligibility.  For example, plan A includes those employees with last names when first eligible beginning with A-L and plan B includes employees with last names when first eligible (avoids having to change if folks change their last name) of M - Z.  The plan can actually be administered as a single plan on most systems showing two different "divisions" (careful about dealing with forfeitures depending on provisions); besides having a separate document, you have a separate 5500.  The cost for doing this (in our house) is trivial; WAY less than the cost of dealing with an audit. 

I vote for MESS.  *IF* this is a controlled group and hasn't been dealt with as such, it's a MESS.  If the goal is to reduce "costs" then what Larry suggests (splitting the one plan into two) *MAY* eliminate the need (and cost) of the annual audit, but it *WILL* increase the costs of maintaining a third plan (going the opposite direction from that posited by the OP).  If they are *NOT* a controlled group, then a closed MEP is a possibility - which if done correctly results in ONE Form 5500, but has other additional costs.

If the primary driver is to save a few pennies on recordkeeping and administration costs, then I'd seriously think long and hard about whether this is a long term client you want....

Could go either way, IMO.  We (I) would generally be inclined to combine plans of companies owned by one person or otherwise part of a controlled group (i.e. have only one plan).  I get the idea about splitting up a plan if it is near the audit threshold but it's just my nature to try to keep things simple, or at least as simple as possible in this silly business.  The advisor might be right about reducing recordkeeping costs (e.g. if there is a $2,200 base fee) but she might just be looking to score points and take over the plan(s).  (I'm pretty sure I could find an alternative if that is the only consideration.)

My approach would be to price out the 2 (or 3 scenarios), taking into account all costs - recordkeeping (including indirect costs), admin, audit, etc. and see what things look like - of course also considering non-monetary factors, like plan design and objectives.  And as noted, if you have a controlled group but different  plans with different plan provisions, you might have testing issues that are not being addressed properly.

Hi and thanks for all of your responses.  I did leave out some important information.  Just one man owns 100% of both businesses.  These two 401(k) plans are identical in every respect as far as the plan provisions are concerned.  It's just that plan A covers one of his businesses, which has about 40 people at most at any one time, and plan B covers a different business with nearly 100 people now.  I don't see how there could be any issues with non-discrimination since both companies' employees are treated exactly the same.  

They don't have any problems with ADP testing because the HCEs scarcely use the plan.  The owner is too cheap to do a Safe Harbor contribution.  They do have a puny match, and neither plan is  highly utilized by either set of employees.

My fear is that if this new advisor pushes the plan sponsor to create one MEP out of it, she will automatically push them into a position where they will have to engage a CPA for an independent audit sooner rather than later.

Business B is growing, they tell me they have hired a lot of new people since 12/31/2017, and by the time we get the census for 2018, it may be a moot point if they have over 120 participants.  

Does a MEP file one 5500 that covers all of the employers who belong to it, or does each employer file its own 5500?

Under the circumstances you describe, my inclination would be to keep separate plans unless and until there was a very good reason to merge them.  A very good reason would be that one of the plans already needs an audit and so you might as well combine them and save on admin fees, at least in theory.  I'm still skeptical that reducing recordkeeping costs is worth the cost of an audit, if it triggers an audit one or two years earlier than it would otherwise be needed.

I see this as a very objective decision, especially if your client is cheap.  Just figure out the total costs one way vs. the other.  "The investment advisor says a MEP is better" is not an analysis.

33 minutes ago, ldr said:

Does a MEP file one 5500 that covers all of the employers who belong to it, or does each employer file its own 5500?

A return is filed for the plan (i.e. one return).  It's just one plan covering two companies.  I think there is a schedule attachment that is simply a list of the sponsoring employers. Calling this a MEP is accurate but I wouldn't use the term because I think it is currently associated with "open" MEPs which are a current hot topic...and I suspect that the advisor is trying to sound important/knowledgeable, as in "MEPs are cool and we can create our own."  I don't want to be too snarky about it because I think there are legitimate times when combining two plans makes a lot of sense, and it probably does in this case, but maybe not right away.

@RatherBeGolfing - No, WE don't want to create a MEP and would never have even thought of it.  We may get pushed into it whether we like it or not, and I'd rather find out a little more about it sooner rather than later.  If creating a MEP automatically pushes them into having to hire an independent auditor for say, 2018, if this was done by December 31st, then we know the sponsor won't want to do it, and that will be the end of it, at least temporarily.

Sometimes I think you guys must live in some idyllic world where hot and cold running minions keep you from getting into situations where you are over your heads.  I am not embarrassed to admit that I don't know everything all by myself and that's why I ask questions on here, even at the risk of looking foolish or less than expert.  Sometimes we get called upon to do things that are beyond our scope just by virtue of working in very small enterprises where there are no minions below us or experts above us to make these things go away......

@Bird, Thank you very much!  This is what I thought might be the case.  Now i feel comfortable recommending that they NOT do this - of course the answer might change if company B ends up having over 120 participants for 2018 - but at least for right this minute, we can say this is not a good idea.

It's probably not a good idea for other reasons as well, not the least of which is that we as the TPA don't know much about MEPs yet, but the reason that will sway the employer is the possibility of having to pay for the independent audit.

32 minutes ago, ldr said:

@RatherBeGolfing - No, WE don't want to create a MEP and would never have even thought of it.  We may get pushed into it whether we like it or not, and I'd rather find out a little more about it sooner rather than later.  If creating a MEP automatically pushes them into having to hire an independent auditor for say, 2018, if this was done by December 31st, then we know the sponsor won't want to do it, and that will be the end of it, at least temporarily.

Sometimes I think you guys must live in some idyllic world where hot and cold running minions keep you from getting into situations where you are over your heads.  I am not embarrassed to admit that I don't know everything all by myself and that's why I ask questions on here, even at the risk of looking foolish or less than expert.  Sometimes we get called upon to do things that are beyond our scope just by virtue of working in very small enterprises where there are no minions below us or experts above us to make these things go away......

I don't think its idyllic to know your limitations and stay within them.  Rather than getting into something that is beyond your scope (and a potential minefield for both you and the client), why not play to your strengths and find a solution that you know you can handle and handle well?  I seriously doubt that the RK savings of a 2 plan MEP will be so significant that other solutions can't be considered.  Take Larry's example of splitting the plan to avoid audits for example.  If additional cost is a concern because you are creating another plan, you can probably drop your fees to stay competitive (after all, the two plans are mirrors of each other).  

I agree, RatherBeGolfing.  This is a situation where I needed first to nip this idea of a MEP in the bud immediately but I needed a good reason to do so.  I got that.  Now, we have a little bit of a breather in which to find out just how many participants really are going to be in Company B's plan for 2018, and to look at the impact of having 3 plans as Larry suggested.  There's no doubt that splitting up Company B's plan into two plans is going to be less expensive for the employer than paying for the audit.

I do agree with an earlier comment that was made about the new investment advisor trying to make a splash by coming up with something "cutting edge" without knowing all the ramifications.  I have no idea to what extent the employer will pay any attention to her in the first place.  I do know that this idea is now right out for 2018, and that was my goal in asking the questions.

If the owner controls 100% of both companies - and they are a control group, wouldn't that be a single employer (though comprised of multiple entities?) thus if their plans are combined into a single plan, it would be a single employer plan (NOT a MEP) just with several participating employers? 

Sounds like the resulting plan would be audit sized, so perhaps not the way to go, but the talk of a MEP (either open or closed) seems like a misnomer. Is there something I over looked from the fact pattern? 

Hi justanotheradmin - the other experienced person in our office, who is supposed to be on vacation, just weighed in and said exactly what you said.  He said that as a controlled group, they could have had one plan all along, but that it wasn't set up that way to avoid the need for the audit.  

17 hours ago, justanotheradmin said:

If the owner controls 100% of both companies - and they are a control group, wouldn't that be a single employer (though comprised of multiple entities?) thus if their plans are combined into a single plan, it would be a single employer plan (NOT a MEP) just with several participating employers? 

That is the correct terminology, thanks.  I got caught up in the "MEP" stuff myself.

On 10/18/2018 at 7:55 AM, MoJo said:

I vote for MESS.  *IF* this is a controlled group and hasn't been dealt with as such, it's a MESS.  If the goal is to reduce "costs" then what Larry suggests (splitting the one plan into two) *MAY* eliminate the need (and cost) of the annual audit, but it *WILL* increase the costs of maintaining a third plan (going the opposite direction from that posited by the OP).  If they are *NOT* a controlled group, then a closed MEP is a possibility - which if done correctly results in ONE Form 5500, but has other additional costs.

If the primary driver is to save a few pennies on recordkeeping and administration costs, then I'd seriously think long and hard about whether this is a long term client you want....

An audit could cost $7,000 to $10,000 or more.  We can split the plan for a one time cost of about $1500 plus an annual cost of substantially under $1000.  Effectively, we are billing for an extra 5500 each year.  

Now that we know this is actually a controlled group of two companies owned by the same individual and that the plans are identical, I would do the following two moves all at one time:

1) Merge the two plans into one; 

2) Split the single plan into two by A-L, M-Z process to avoid the audit.  

You still end up with two plans, but now covering both companies, and with ALL the employees split of both split between the two and avoiding an audit for many more years.  It is the most practical answer.

@ Larry Starr,

Thank you very much.  I agree and that's what I am going to propose in a meeting this week with the client and the advisor.  Meanwhile I learned that the advisor wasn't aware of the possible technique of splitting the plan in two to avoid the audit.  She's having to back down a little bit, at least in emails so far.

They may yet opt for 3 plans total.  The characteristics of the small company are nothing at all like the characteristics of the large company as far as type of business is concerned.  One is a professional office and the other (large company) is in the hospitality/service industry.  They are not keen on blending these groups and having any personnel in one office accessing plan records of anyone in the other business and vice versa.

But the important part of all this is that at least the hospitality business can have its plan split in two and avoid the audit.  The professional office will never grow large enough to have this problem.

Thanks to all of you for your input!

The splitting of the plan into 2 separate plans is a new concept for me. Can you really take a plan and make it into 2 using last names as the determination for who is in what plan? How is that entered into an adoption agreement?

Please tell me more!

2 hours ago, coleboy said:

The splitting of the plan into 2 separate plans is a new concept for me. Can you really take a plan and make it into 2 using last names as the determination for who is in what plan? How is that entered into an adoption agreement?

Please tell me more!

Most AAs can accommodate "other" exclusions

Plan A excludes M-Z

Plan B excludes A-L

You can split any way that is reasonable, but this way has less opportunity for participants moving from plan to plan.

4 hours ago, RatherBeGolfing said:

Most AAs can accommodate "other" exclusions

Plan A excludes M-Z

Plan B excludes A-L

You can split any way that is reasonable, but this way has less opportunity for participants moving from plan to plan.

And remember to define it as last names at time of first eligibility to avoid people moving when there are last name changes as in marriages/divorces.   PS: We don't use adoption agreements. We customize all plan documents so we use a volume submitter with an AA.

Thank you all esp Larry Starr for explaining more about how to do this.  We have never done it either - we have heard of it and mentioned it to a client or two, but never actually did it until now and it's looking very likely that the hospitality company will need this, going forward.

On 10/23/2018 at 7:50 PM, Larry Starr said:

And remember to define it as last names at time of first eligibility to avoid people moving when there are last name changes as in marriages/divorces.   PS: We don't use adoption agreements. We customize all plan documents so we use a volume submitter with an AA.

OOPS!  That last line should be ".... so we use a volume submitted WITHOUT an AA".

1 hour ago, ldr said:

Thank you all esp Larry Starr for explaining more about how to do this.  We have never done it either - we have heard of it and mentioned it to a client or two, but never actually did it until now and it's looking very likely that the hospitality company will need this, going forward.

And you really can run it on your admin system as one plan with two divisions; it isn't difficult.  Just a couple of things you have to watch out for (already noted one previously re: forfeitures). Of course, TWO 5500s.