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

Practical Law Legal Update w-034-9781 (Approx. 7 pages)

IRS Reissues 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 (CBA) 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(c)) 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).

To learn more about MEPs, see Practice Note, Multiple Employer Retirement Plans (MEPs).

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).

In July 2019, the DOL issued final regulations on Association Retirement Plans, which expanded the availability of MEPs (see Legal Update, DOL Expands MEP Availability in Final Regulations on Association Retirement Plans).

In December 2019, Congress enacted the SECURE Act, which created a new MEP called a pooled employer plan (PEP) that allows unrelated employers to join together to participate in one MEP, and addressed the "bad apple" qualification problem (see Unified Plan ("Bad Apple") Rule) to provide that the qualification of the MEP will not be affected if certain procedures are followed (see Legal Update, Government Funding Legislation Includes the SECURE Act, Which Changes Retirement Plan Requirements: Multiple Employer Plans). The DOL released a final rule in November 2020 that provides registration requirements for pooled plan providers of PEPs (see Legal Update, DOL Issues Final Rule Providing Registration Requirements for Pooled Plan Providers).

In January 2022, the DOL updated the Form 5500 instructions to reflect the SECURE Act's addition of PEPs as a type of MEP that must file a Form 5500 (see Legal Update, DOL Finalizes Revisions to 2021 Form 5500 Instructions to Reflect SECURE Act Changes).

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.

2022 Proposed Regulations

The 2022 proposed regulations would implement the exception to the unified plan rule (unified plan exception) for defined contribution MEPs (which are referred to in the preamble to the 2022 proposed regulations as Section 413(e) plans).

2019 Proposed Regulations Withdrawn

A public hearing on the 2019 proposed regulations was held on December 11, 2019. The provisions of the 2022 proposed regulations were informed by the comments received on the 2019 proposed regulations, which have been withdrawn by Treasury and the IRS.

Definitions

26 C.F.R. Section 1.413-3(a)(4)(viii) of the proposed regulations would define a MEP as a defined contribution plan described in Code Section 401(a), or a plan that consists of individual retirement accounts (IRAs) described in Code Section 408, that is:

A Code Section 413(c) plan (a single plan maintained by more than one employer).
And that either:
- is maintained by employers that have a common interest other than having adopted the plan; or
- has a pooled plan provider (the term pooled plan provider is defined under Code Section 413(e)(3)(A) as a named fiduciary of a PEP).

The 2022 proposed regulations would define a participating employer as one of the employers maintaining a MEP, and they would define an unresponsive participating employer as a participating employer that has a participating employer failure.

Both the known qualification failure and potential qualification failure from the 2019 proposed regulations have been withdrawn. Instead, a participating employer failure under the 2022 proposed regulations would be defined as a failure to provide information or a failure to take action. Specifically:

A failure to provide information would be defined as a failure of a participating employer to respond in a timely manner to a reasonable request by the MEP administrator for data, documents, or any other information that the plan administrator reasonably believes is necessary to determine whether a MEP is in compliance with a requirement of Code Sections 401(a) or 408 as it relates to the participating employer.
A failure to take action would be defined as a failure of a participating employer to comply in a timely manner with a reasonable request by a MEP administrator to take action needed for the MEP to satisfy a requirement of Code Sections 401(a) or 408 as it relates to the participating employer.

Requirements for the Unified Plan Exception

The 2022 proposed regulations would provide that 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 terms of the MEP plan document must include language describing the procedures that will be followed to address a participating employer failure.
The MEP administrator provides up to three notices regarding a participating employer failure to the unresponsive participating employer. The final notice, if applicable, would also be provided to participants who are employees of the employer (and their beneficiaries) and the DOL. Those notices are discussed in detail in the proposed regulations. (The 2019 proposed regulations provided that a plan was ineligible for the unified plan exception if the plan was under examination before the first notice was provided to an unresponsive participating employer; the 2022 proposed regulations do not include that condition.)
After the unresponsive participating employer has received the required notices of the failure, it will have the opportunity to either 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 initiates a spinoff, the MEP administrator must implement and complete the spinoff as soon as reasonably practicable. Under a safe harbor in the 2022 proposed regulations (26 C.F.R. § 1.413-3(d)(2)), the MEP administrator is treated as satisfying this requirement if the spinoff is completed within 180 days of the date on which the unresponsive participating employer initiates the spinoff.
If the unresponsive participating employer's failure to provide information becomes a failure to take action, a MEP will be eligible for the unified plan exception with respect to the failure to take action by satisfying the conditions set forth in the 2022 proposed regulations with respect to that failure. In response to comments on the 2019 proposed regulations that there were too many notices required in cases in which the failure to provide information became a failure to take action, the 2022 proposed regulations permit the MEP administrator to reduce the number of notices that it sends to the employer in this situation.
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:
- stops accepting contributions from the unresponsive participating employer and its employees;
- provides notice to participants who are employees of the unresponsive participating employer, and their beneficiaries; and
- provides participants who are employees of the unresponsive participating employer, and their beneficiaries, with an election regarding treatment of their plan accounts.
If the MEP has a pooled plan provider during the plan year of a participating employer failure, the unified plan exception will not apply unless the pooled plan provider performs substantially all of the administrative duties that are required of the pooled plan provider for that year.

The preamble to the 2022 proposed regulations also discusses how this exception to the unified plan rule is coordinated with plan corrections under the Employee Plans Compliance Resolution System (EPCRS).

In a footnote, the preamble to the 2022 proposed regulations indicates that the rules in 26 C.F.R. Section 1.416-1, including a rule similar to the unified plan rule, are outside the scope of the 2022 proposed regulations, but the Treasury Department and the IRS intend to address the topic when they update the regulations under Code Section 416.

The 2022 proposed regulations are proposed to apply beginning on the date that they are published as final regulations in the Federal Register. Until the final regulations are published, an employer or pooled plan provider may rely on the 2022 proposed regulations.

Treasury and the IRS are accepting comments on the 2022 proposed regulations. The IRS has scheduled a telephonic public hearing for June 22, 2022.

Practical Implications

Employers that participate in defined contribution MEPs, or are considering MEP participation, should monitor the status of the 2022 proposed regulations, which provide an exception, if certain requirements are met, to the application of the unified plan rule for MEPs in the event of a failure by one or more employers participating in the plan to meet the requirements of the Code.

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