IRS Issues Proposed Regulations Providing an Exception to the Unified Plan Rule for Multiple Employer Plans (MEPs)

Practical Law Legal Update w-021-1288 (Approx. 5 pages)

IRS Issues Proposed Regulations Providing an Exception to the Unified Plan Rule for Multiple Employer Plans (MEPs)

by Practical Law Employee Benefits & Executive Compensation

Multiple Employer Plans

A MEP is an employee benefit plan maintained by more than one employer:

That is not maintained in accordance with a collective bargaining agreement with a labor union.
At least one of which does not share sufficient ownership with any of the other employers to be considered a member of an affiliated or controlled group (see Practice Note, Controlled Group and Affiliated Service Group Rules).

Code Section 413(c) (26 U.S.C. § 413) and the regulations provide that all of the employers maintaining a MEP (the participating employers) are treated as a single employer for certain tax-qualification requirements, including the:

Minimum participation standards of Code Section 410(a) (26 U.S.C. § 410(a)).
Exclusive benefit rule of Code Section 401(a) (26 U.S.C. § 401(a)).
Minimum vesting standards of Code Section 411 (26 U.S.C. § 411).

In August 2018, President Trump issued an executive order directing the Treasury Department and the DOL to develop regulations that would expand employer access to MEPs and clarify MEP requirements (see Legal Update, President Trump Issues Executive Order to Encourage Small Employers to Sponsor Retirement Plans).

In October 2018, the DOL issued proposed regulations clarifying when an employer group or association or a professional employer organization (PEO) constitutes an "employer" under ERISA Section 3(5) (29 U.S.C. § 1002(5)) for purposes of sponsoring a MEP (also referred to as "association retirement plans" in the proposal) (see Legal Update, DOL Issues Proposed Regulations on Association Retirement Plans).

Unified Plan ("Bad Apple") Rule

Treasury Regulation Section 1.413-2(a)(3)(iv) provides that the tax qualification of MEPs is determined with respect to all employers maintaining the MEP. The failure by one participating employer to satisfy a qualification requirement will result in the disqualification of the MEP for all of its participating employers (26 C.F.R. § 1.413-2(a)(3)(iv)). This is the unified plan rule, frequently termed the "bad apple" rule.

Proposed Regulations

The proposed regulations would provide an exception to the unified plan rule for defined contribution MEPs. The exception to the unified plan rule would only apply to two types of participating employer failures:

Known qualification failure: a failure to satisfy a qualification requirement with respect to a MEP that is identified by the Code Section 413(c) plan administrator (the administrator of the MEP) and is attributable solely to an unresponsive participating employer.
Potential qualification failure: a failure to satisfy a qualification requirement with respect to a MEP that the MEP administrator reasonably believes might exist, but is unable to verify solely due to an unresponsive participating employer's failure to provide data, documents, or any other information necessary to determine whether the MEP is in compliance with the qualification requirement as it relates to the participating employer.

The proposed regulations would define a participating employer as one of the employers maintaining a MEP; an unresponsive participating employer would be defined as a participating employer in a MEP that fails to comply with reasonable and timely requests from the MEP administrator for either:

Information necessary to determine compliance with a qualification requirement.
Actions that are needed to correct a failure to satisfy a qualification requirement as it relates to the participating employer.

If one of the two applicable participating employer failures occurs, then a defined contribution MEP could avail itself of the exception to the unified plan rule and avoid disqualification on account of the employer failure if the following conditions are satisfied:

The MEP satisfies certain eligibility requirements, including:
- the MEP plan administrator has established practices and procedures (formal or informal) reasonably designed to promote compliance with applicable Code requirements;
- the MEP's plan document includes language describing the procedures that would be followed to address participating employer failures, including an unresponsive participating employer's failures to act (the preamble indicates that after the final regulations are issued, Treasury and the IRS expect to publish model plan language that may be used for this purpose); and
- the MEP is not under examination, as defined in the proposed regulations.
The MEP plan administrator provides the unresponsive participating employer up to three notices regarding the participating employer failure. Those notices are discussed in detail in the proposed regulations.
After the unresponsive participating employer has received the notices required by the proposed regulations, the MEP provides the unresponsive participating employer with the opportunity to take appropriate remedial action regarding the participating employer failure or to initiate a spinoff of the plan assets and account balances held on behalf of employees of that employer to a separate single-employer plan.
If the unresponsive participating employer takes appropriate remedial action regarding a known qualification failure, then the Code Section 413(c) plan administrator must take any remaining action necessary to correct the qualification failure. If the unresponsive participating employer fails to take appropriate remedial action and instead initiates a spin-off of plan assets to a separate single-employer plan, the MEP administrator must complete the spinoff with respect to the participating employer failure.
If the unresponsive participating employer neither takes appropriate remedial action nor initiates a spinoff after receiving the required notices, then the exception to the unified plan rule will apply only if the MEP administrator:
- spins-off the plan assets and account balances held on behalf of the employees of the unresponsive participating employer to a separate single-employer plan;
- terminates the spun-off plan and distributes the assets to the plan participants and beneficiaries as specified by the proposed regulations; and
- the MEP administrator complies with any information requests made by the IRS or representative of the spun-off plan made in connection with an IRS examination of that plan.

The public is invited to submit comments on the proposed regulations. The comments are due October 1, 2019.

Practical Implications

Employers that participate in defined contribution MEPs, or are considering MEP participation, should monitor the status of these proposed regulations. If finalized, the regulations may make it easier for MEPs to maintain favorable tax-qualification status and thereby reduce compliance risks for participating employers.

IRS Issues Proposed Regulations Providing an Exception to the Unified Plan Rule for Multiple Employer Plans (MEPs) | Practical Law