IRS Issues Proposed MEP Rule

The IRS has released a new proposed rule providing for an exception, if certain requirements are met, to the application of the “unified plan rule” for multiple employer plans (MEPs) when there is a failure by one or more participating employers to take actions necessary to satisfy requirements of the Internal Revenue Code. The unified plan rule (also referred to as “one bad apple rule”) specifies that the failure by one participating employer to satisfy an applicable qualification requirement would result in the disqualification of the MEP for all employers maintaining the plan. The release also withdraws prior proposed regulations that were published in the Federal Register on July 3, 2019.

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) created a statutory exception to the unified plan rule for certain types of MEPs and directed the Secretary to issue guidance to carry out that provision. The exception applies to defined contribution plans maintained by employers that have a “common interest” or have a “pooled plan provider” and failed to take action required to meet qualification requirements, subject to the following conditions.

  • The plan assets attributable to employees of the employer that failed to take action will be transferred to a plan maintained only by that employer
  • The employer (and not the plan or any other employer in the plan) will generally be responsible for liabilities with respect to the plan attributable to employees of that employer
  • The pooled plan provider performs substantially all of the administrative duties for which it is responsible for any plan year

The proposed regulations provide that the terms of the MEP document must include language describing the procedures that will be followed to address a participating employer failure, including a description of the notices that the plan administrator will send and when such notices will be sent. The plan terms must also describe the actions that the plan administrator will take if by the end of the 60-day period following the date the final notice is provided, the unresponsive participating employer does not take appropriate action with respect to the failure or initiate a spinoff to a separate plan maintained by the employer. The IRS intends to publish model language for this purpose in connection with a final rule.

Under the proposal, a MEP plan administrator may be required to provide up to three notices to an unresponsive participating employer regarding a failure—with the final notice also being provided to affected participants and the Department of Labor. The unresponsive participating employer can either take appropriate remedial action or initiate a spinoff. The proposal delineates notice requirements for both “a failure to provide information” and a “failure to take action”, and in situations where a failure by a participating employer is initially a failure to provide information, but becomes a failure to take action, more than three notices may be necessary.

If an unresponsive participating employer neither takes appropriate action or initiates a spinoff within 60 days after the final notice is provided, the MEP plan administrator must 1) stop accepting contributions from the unresponsive participating employer and participants, 2) provide notice to affected participants of the unresponsive participating employer, and 3) provide participants with an election regarding treatment of their accounts.

Comments may be submitted within 60 days of publication in the Federal Register. A public hearing on the proposed rule has been scheduled for Wednesday, June 22.