The Multi-Unit Franchise 401(k) Trap Hiding in Your LLC Structure

Owning eight franchise locations through eight separate LLCs feels like running eight small businesses. For multi-unit franchise 401(k) purposes, federal law often disagrees, and that disagreement has gotten expensive to get wrong.

Most multi-unit operators set up a new LLC for every location on their attorney's advice, mainly to wall off liability if one unit gets sued or goes under. That structure works exactly as intended for liability. It does almost nothing for retirement plan compliance, because the IRS and the Department of Labor look through the LLC paperwork and ask a different question: who actually controls these entities? If the answer is one person or one small ownership group across all of them, the entities get treated as a single employer under the controlled group rules in the tax code, the same way a restaurant group's five locations share one kitchen crew's payroll tax filing even though each storefront has its own sign out front and its own liquor license.

Why the LLC structure doesn't end the employer question

The controlled group rule matters because several retirement plan requirements, including coverage testing and a key exemption inside SECURE 2.0, are measured at the controlled group level, not the individual LLC level. An operator running six locations with nine employees apiece might assume each entity qualifies for the small-employer carve-out built into federal auto-enrollment requirements. Aggregated across the controlled group, that operator has 54 employees, and the carve-out no longer applies to any of them.

What SECURE 2.0 actually requires starting now

Any 401(k) or 403(b) plan established on or after December 29, 2022 has to automatically enroll eligible employees starting with the 2025 plan year, at a default deferral rate of at least 3 percent, stepping up one percentage point a year until it reaches at least 10 percent, capped at 15 percent. The only exemptions are businesses with 10 or fewer employees, businesses less than three years old, and church or government plans. For a franchise group counted as one controlled employer, that 10-employee line gets crossed fast, often with the fourth or fifth location. Operators who opened their first location's plan before the cutoff date sometimes assume the whole group is grandfathered in. It isn't, if a new location's plan, or an amendment that counts as a new plan under IRS guidance, gets adopted after the date.

Standalone plan, MEP, or PEP: the multi-unit franchise 401(k) decision

A standalone plan means the operator is the plan sponsor, full stop, carrying every fiduciary and administrative duty unless specific pieces get delegated to a recordkeeper or advisor. A multiple employer plan, the older MEP structure, historically required some organizational connection between the participating employers, which rarely fits a group of franchise locations owned by one person anyway. A pooled employer plan, created by the original SECURE Act and opened for business in 2021, removed that connection requirement entirely. Unrelated employers, including franchisees of completely different brands, can join the same PEP administered by a pooled plan provider. The structure caught on fast: PEP assets grew from $2.2 billion in 2021 to roughly $34 billion by the end of 2025, and the number of participating employers grew from about 8,600 to more than 51,000 over the same stretch, according to Department of Labor filing data reported by Insurance Business America.

The fiduciary liability that moves when you pool

The appeal of a PEP isn't just fewer plan documents. It's a real shift in who holds the risk. In a standalone plan, the operator (or whoever they've designated) signs off on the investment menu, the plan design, and every operational decision, and carries personal fiduciary exposure if a participant later argues the plan was mismanaged. In a PEP, the pooled plan provider takes on the administrative fiduciary role and typically the investment fiduciary role too, leaving the adopting employer with a narrower job: picking a competent provider and periodically checking that they are still doing it well. That is a meaningfully different risk profile, similar to the difference between running payroll in-house and handing it to a professional employer organization. The operator is not out of the fiduciary picture, but the exposure that used to sit entirely on one desk now sits mostly on the provider's.

What a provider comparison should actually test

Not every PEP or recordkeeper handles a multi-unit franchise group the same way, and the differences show up in the parts of the sales pitch nobody asks about. Confirm how the provider treats seasonal and part-time staff for eligibility, since franchise locations run higher part-time ratios than the median small business the provider's marketing was built around. Ask whether per-location payroll data feeds in automatically or requires a manual file upload from each location's point-of-sale or scheduling system, because that gap is where contribution errors start. Check the fee structure: asset-based fees scale with plan balances in a way flat per-participant fees don't, and a group adding locations every year should model both over a five-year horizon, not just the year-one quote. And watch the 100-participant line. A plan with fewer than 100 participants skips the annual independent audit requirement. Pool five locations that were each running under that line into one PEP, and the combined group can cross it, trading a paperwork simplification for a new annual audit bill nobody priced into the decision.

The number to calculate before the next open enrollment

Before the next plan year, add up every eligible employee across every commonly controlled entity, not per location. Check that total against the 10-employee auto-enrollment exemption and the 100-participant audit threshold, and check every location's plan or amendment date against December 29, 2022. Those three numbers, not the franchise agreement or the LLC operating agreements, define actual multi-unit franchise 401(k) exposure this year. Revscale's franchise intelligence layer surfaces that same consolidated headcount, pulled automatically across every connected location rather than reassembled by hand each renewal, as one of the smaller but more consequential byproducts of unifying location data. Getting the number right once beats re-deriving it under pressure the week a participant complaint or a DOL audit letter arrives.