The Internal Revenue Service (IRS) issued proposed regulations under Internal Revenue Code Section 413(c) governing multiple employer plans (MEPs). The proposed regulations would provide an exception to the unified plan rule for a defined contribution MEP that would allow the MEP to remain tax-qualified even if a participating employer does not meet tax qualification requirements.
On July 2, 2019, the Internal Revenue Service (IRS) issued proposed regulations under Internal Revenue Code (Code) Section 413(c) (26 U.S.C. § 413(c)) governing multiple employer plans (MEPs) (84 Fed. Reg. 31777 (July 3, 2019)). The proposed regulations would provide an exception to the unified plan rule (or "bad apple" rule) for a defined contribution MEP that would allow the MEP to remain tax-qualified even if a participating employer does not meet the plan qualification requirements or provide necessary information to determine compliance with a qualification requirement.
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.
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:
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.