Topic Employee Benefits

The Advantages of PEO 401(k) Retirement Plans

The Advantages of PEO 401(k) Retirement Plans

As of 2020, studies show that it is alarmingly difficult to find top-talent employees. According to ManpowerGroup, we're experiencing the highest shortage in more than a decade, with 69% of U.S. companies reporting a deficiency in talent. In response, employers are being pushed to maximize their appeal and offers.

Learn more about how you can elevate your employee engagement

A key to attracting top talent is offering great employee benefits and investment options. More specifically, benefit plans that include retirement plans and retirement plan services.

Why offer a 401(k) retirement plan?

From a competitive standpoint, you should offer 401(k) retirement plans because potential hires want them. According to Access Perks, 81% of employees said retirement benefits make up a major portion of job search. Yet, ADP reveals that only 50% of companies surveyed offer retirement benefits.

This is surprising since there are genuine benefits for both employees and employers.

Employee benefits

Employees benefit from financial stability and a concrete savings plan that will help their future after work. Many employees have trouble putting money aside that isn't automatically withdrawn from their paychecks. In fact, 92% of American workers with 401(k) plans have reported that having a payroll deduction helps them save. 

According to AICPA, when employees were asked which benefits would help them meet their financial goals, 56% cited a 401(k) match.

Not to mention, contributions are tax-free until distribution and often matched by the employer.

Employer benefits

Likewise, employers also benefit from offering 401(k) plans. First and foremost, there is the benefit of 401(k)'s come tax time that you won't want to miss out on. 

The IRS highlights two tax advantages for employers:

  1. Employer contributions are deductible on the employer's federal income tax return to the extent that the contributions do not exceed the limitations.
  2. Elective deferrals and investment gains are not currently taxed and enjoy tax deferral until distribution.

Then there is the benefit of vesting. If you implement graded or cliff vesting into your plans, you can give employees an extra incentive to stay with your company until they have full ownership of their 410(k).

What is a PEO Retirement plan?

A PEO retirement plan is when you are partner with a Professional Employer Organization that gives you the option to take advantage of a Multi-Employer Plan (MEP). It allows you to outsource your fiduciary liability over plan assets for protection, while also reducing administrative costs related to offering the plan.

Multi-Employer Plan (MEP)

An MEP is a retirement savings plan available to multiple employers and administered by a Multi-Employer Plan sponsor, who is accountable for all the administrative responsibilities. The idea is to reduce the burden of expenses to encourage more businesses to offer employee benefits.

Groom Law Group reports that the government recently issued an executive order that "directed DOL [and the IRS] to consider issuing regulations or other guidance to make it easier for small and mid-size businesses, including those with non-traditional employment structures, to participate in MEPs." In response, DOL, "issued a proposed regulation to supersede its prior guidance and clarify when a group or association, or a PEO, would be acting as an ‘employer’ under ERISA that may sponsor an MEP.”

The Department of Labor (DOL) regulations state that only bona fide PEOs are permitted to sponsor single defined contribution multiple employer plans. This applies to PEOs that perform substantial employment functions on behalf of client employers and is determined based on a facts and circumstances test. 


One of the benefits of MEP is that it's customizable. The client chooses eligibility conditions, age limits, vesting, hour requirements, and entry gate (1st of the month vs. end of the quarter).

Then, the match is customizable, allowing the employer to choose to make a:

  1. Discretionary match — employers choose the percentage to match and can adjust when they see fit.
  2. Safe harbor contribution — employers make annual contributions on behalf of employees, and they're immediately vested. In light of the SECURE Act, it's "easier for small businesses to set up 401(k)s by increasing the cap under which they can automatically enroll workers in safe harbor retirement plans from 10% of wages to 15%."
  3. Basic employer contribution — employers make the basic contribution up to 100% of what their employees invest into their accounts.

What are the benefits of a PEO Retirement Plan?

There are several benefits of a PEO Retirement Plan, but four should be specially noted. 

1. Reduced Fees

Employee asset-based fees are lower since a MEP has more assets than any individual employer has on their own. Employers also don't have to pay a CPA or similar professional for an annual audit.

2. Compliance

The PEO takes responsibility for keeping retirement plans compliant no matter how it is customized. The PEO also handles reports and disclosures. This allows employers to spend more time growing their business and less time stressing over regulations and paperwork.

3. No Fiduciary Responsibility

PEO takes up all liability for transactions and funds associated with the plan. That means employers can be guaranteed that their employees are taken care of with a PEO's 401(k) plan without the liability risks associated. 

4. Less Administrative burden

In the case of administrative duties associated with the plan, it can be a headache to keep up. Fortunately, PEOs take this burden off of employers, including responsibilities like:

  • Annual discrimination audit testing
  • Loan deduction and review
  • Safe harbor contribution reconciliation
  • Filing of 5500
  • Distributions

Make Your Life Easier

Nowadays, employers need to offer retirement plans to attract and retain employees. The problem for many is that it can get incredibly complex and difficult to manage. That is why so many employers look to PEOs to make their decision much easier. It's the best of both worlds — employees are satisfied with their benefits, and the complexities of offering a 401(k) are outsourced to PEOs. 

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Wendy Katz

Wendy Katz

Wendy Katz is the Chief Financial Officer at Questco Companies. Wendy is aiding our clients’ drive for profitability and compliance by providing pragmatic insights and sound financial solutions to constantly evolving HR challenges.