A PEP retirement plan is a type of 401(k) that lets multiple unrelated small businesses join a single retirement plan, sharing costs and administrative burdens. Congress created PEPs in 2019 as part of the SECURE Act.
PEPs work like a traditional 401(k) but serve multiple employers under one plan. A third-party provider handles setup, compliance, and recordkeeping. Employers choose contribution structures (e.g., matching or profit-sharing) and set their own eligibility rules.
For example, a local coffee shop and a nearby bookstore could both join the same PEP. The coffee shop might offer a 3% match, while the bookstore contributes 2%. Both businesses benefit from lower fees than managing separate plans.
PEPs combine elements of multiple employer plans (MEPs) and pooled plans:
PEPs are ideal for small businesses that lack resources to administer their own retirement plans. Common users include:
According to the U.S. Department of Labor, nearly 40 million workers lack access to employer-sponsored retirement plans. PEPs help close this gap by making retirement benefits accessible to small businesses.
PEPs differ from other retirement plans in key ways:
| Feature | PEP | Traditional 401(k) | SIMPLE IRA |
|---|---|---|---|
| Number of employers | Multiple | Single | Single |
| Minimum participation requirement | None | Varies (often 50+ employees) | 100 or fewer employees |
| Administrative burden | td>Low (handled by provider)High (employer manages) | Moderate (simplified rules) |
Let's say three small businesses-a bakery, a gym, and a marketing agency-join the same PEP. The provider sets up the plan with standard rules, such as a 6% employee contribution limit. Each business customizes its contributions:
The provider handles all administrative tasks, including IRS filings and compliance. Employees from all three businesses contribute to the same plan, with their funds managed by the provider.
I helped a client set up a PEP for their small business association. By pooling resources with other local businesses, they reduced administrative costs by 40% compared to maintaining separate plans.
Some believe PEPs are only for large corporations or require complex setups. In reality, PEPs simplify retirement planning for small businesses. Another myth is that PEPs lack flexibility-each employer can still customize contributions and eligibility rules.
A PEP retirement plan offers small businesses an affordable way to provide retirement benefits by pooling resources with other employers. With lower administrative costs and flexible contribution options, PEPs make retirement planning accessible to businesses that might otherwise struggle to offer these benefits.