Decoding the Alphabet Soup: What’s With All the Acronyms | Part 4

We in the retirement plan business sure do like our acronyms. In fact, it might actually be possible to carry on an entire conversation using only acronyms and no real words.

It’s been a minute since our last post on how to translate this geek-speak. With the flurry of recent regulatory activity and related posts, we figured it was a good time to bring you some lighter fare to help make sense of all these acronyms.

In this installment, we cover some different flavors of retirement plans. Without further ado…

MEP

What It Means: Multiple Employer Plan

How To Pronounce It: Mehp

What It Is: A MEP is a single plan that covers the employees of two or more unrelated companies. When we say unrelated, we mean the companies do not share enough common ownership or business overlap to be part of the same controlled group or affiliated service group. MEPs have had a rocky regulatory road over the years until the Department of Labor issued regulations in 2019 that clarified their legal status. Only certain entities can sponsor and/or participate in a MEP. If you care to go down that rabbit hole, we’ve got you covered here.

PEP

What It Means: Pooled Employer Plan

How To Pronounce It: Pehp

What It Is: This plan type is a subset of the MEP and operates very similarly in many ways. One of the primary differences is that rather than being sponsored by an association or PEO, a PEP must be sponsored by a Pooled Plan Provider or PPP, which is often a retirement plan industry service provider such as a recordkeeper. Intrigued? We’ve got more on this for you here.

SEP

What It Means: Simplified Employee Pension

How To Pronounce It: Sehp

What It Is: With the increase in popularity of MEPs, some have started to use this acronym to refer to single employer plans; however, that’s not correct. As the name suggests, a SEP is a stripped-down, easy to maintain version of a profit sharing plan (though if established before 1997, a SEP can also allow employee deferrals). In exchange for the ease of maintenance, there are some pretty rigid design limitations. We cover more of the details here.

SIMPLE

What It Means: Savings Incentive Match Plan for Employees

How To Pronounce It: Simple

What It Is: This plan type came along in 1997, round about the same time SEPs were no longer allowed to include employee salary deferrals. The SIMPLE is, well, a simplified version of a 401(k) plan for small businesses. It comes in two flavors – a SIMPLE 401(k) and a SIMPLE IRA – with different contribution limits. Both versions require either a company match or a nonelective contribution, which must be fully vested at all times. Click here to see why you shouldn’t let this acronym fool you.

ROBS

What It Means: Rollover as Business Startup

How To Pronounce It: Robs…as in robs Peter to pay Paul

What It Is: This is a favorite among the crew at DWC. It was coined by the IRS, which should give you a good idea of what they think. These arrangements were heavily promoted during the aughts by some vendors who were either less-than-knowledgeable or less-then-scrupulous or some of both. The TL;DR on how these work is as follows:

• Employee of another company quits to start his or her own business.
• Employee incorporates new company and sets up a 401(k) plan.
• Employee rolls over balance from previous employer’s 401(k) plan into the plan of his/her new company.
• Employee then uses his/her rollover balance in the new plan to buy the stock of the company from him/herself (so that the company is now a plan asset).
• Employee uses the proceeds from selling the stock to the plan as a tax-free way to fund the business.

It is technically possible (theoretically, at least) to implement and operate a ROBS plan in a compliant manner, but there is a reason (actually, many of them) why it sounds too good to be true. We’ll leave it to the IRS to explain.

Curious about other ridiculous retirement plan acronyms? Check out some of our previous installments. If there’s one we haven’t covered that’s got you scratching your head, hit us up, and we can add it to the list for a future post. Interested in a quick reference side-by-side comparison of some of these plan types, take a look at what we’ve put together here.