A multiple employer plan (“MEP”) is a tax qualified retirement plan that is maintained by two or more employers that are not part of the same controlled group of employers. MEPs have received quite a bit of attention recently because they are seen as a possible mechanism for increasing the number of employees who are covered by a retirement plan. MEPs enable a number of otherwise unrelated employers to come together to establish a retirement plan that has the potential to be less expensive and more efficient to operate than a smaller plan of a single employer operating by itself. On August 31, 2018, President Trump issued Executive Order 13847, which encouraged expanded access to MEPs by, in part, directing the Treasury Department to consider adopting regulations that would make it easier for MEPs to meet the qualification rules under the Internal Revenue Code (“IRC”).
A MEP is subject to rules established by both the IRS under the IRC and the Department of Labor (“DOL”) under ERISA. For example, the regulations under the IRC include rules requiring that participation and vesting of employees covered by the MEP be determined by treating all employers maintaining the MEP as a single employer. The DOL, for its part, requires that in order to qualify as a MEP, the employers forming the MEP cannot be completely unrelated. The DOL has historically mandated that the employers be a “bona-fide group or association of employers” and that they share an economic interest other than merely the provision of employee benefits. New final regulations clarifying the criteria for groups of employers to qualify as a MEP were just published by the DOL on July 31, 2019, and we will discuss these regulations in a subsequent article.
One of the IRC regulations that has proven to be an imposition to the willingness of plan sponsors to participate in MEPs is the unified plan rule, which is also known as the “one bad apple rule.” This rule states that if one employer in the MEP fails to meet all of the qualification rules (a not uncommon occurrence), the entire MEP can be disqualified. The IRS observes that employers are concerned that this rule means that the cooperation of participating employers in the MEP is needed for compliance and when a participating employer refuses to take the steps needed to maintain qualification, the entire plan is at risk of being disqualified.(See FAQ on 401(k) Retirement Plan Disqualification). Without an exception to the unified plan rule, many employers perceive that the benefits of joining a MEP are outweighed by the risk of plan disqualification based on the actions of an uncooperative participating employer.
On July 3, 2019, the IRS issued proposed regulations designed to provide some relief from the one bad apple rule by providing a procedure for the MEP to deal with an uncorporating and unresponsive participating employer. If the procedure detailed in the proposed regulation is followed, the MEP can avoid disqualification caused by a participating employer that is not cooperating in fixing a qualification failure.
The proposed regulation contains a number of steps and the entire process could take over a year from start to finish. The major components to the proposal include the following:
In order to use the procedure, the MEP must have established practices and procedures to promote compliance and must meet a requirement to adopt relevant plan language;
The MEP administrator must provide notice and an opportunity for the unresponsive participating employer to take remedial action with respect to the participating employer failure, including a spin-off of its portion of the MEP;
If the unresponsive participating employer fails to take appropriate remedial action with respect to the failure, or the participating employer does not initiate a spin-off, the MEP plan administrator can initiate a spinoff-termination of the unresponsive employer’s portion of the MEP; and
The MEP plan administrator must comply with any information request that the IRS or a representative of the spun-off plan makes in connection with an IRS examination of the spun-off plan.
The notice requirement is fairly extensive, consisting of three sequential notices to the unresponsive participating employer over a period of 270 days. The first notice describes the failure, how it should be corrected, and the consequences if the employer does not take appropriate action. Ninety days after the first notice, if the employer has yet to take appropriate action, the MEP plan administrator issues a second notice to the employer. This notice includes the information from the first notice, but also informs the employer that if it doesn’t take remedial action within another 90 days the MEP plan administrator will notify the employer’s participants and the DOL of the issue. Finally, if the employer has not yet acted at the end of the second 90-day period, the MEP administrator sends out a third notice, this time to the unresponsive employer, its participants, and the DOL, explaining the problem and the consequences if the MEP plan administrator must initiate a spinoff-termination. The final deadline for an unresponsive participating employer to correct the failure or to initiate a spin-off itself is 90 days after the third notice is provided.
Upon the failure of the employer to act after the third notice, the MEP plan administrator initiates a spinoff-termination of the unresponsive employer’s participants. However, notwithstanding the qualification failure in this portion of the plan, the proposed regulations generally provide that distributions from the spinoff-termination will not fail to be eligible for favorable tax treatment accorded to distributions from qualified plans (including that the distributions will be treated as eligible rollover distributions).
The proposed regulations contain considerable additional detail not described here, but it is likely that there will be changes made to this procedure before it is finalized. We are hoping that the final regulations will provide for a significantly more streamlined approach for addressing this barrier to the availability of MEPs. While it is a positive step for the IRS to make efforts to mitigate the effects of the one bad apple rule,as it is currently written the procedure will likely impose administrative burdens and not unsubstantial costs on MEP administrators. It also raises some administrative and fiduciary questions (the IRS has specifically asked for comments on fiduciary issues). The IRS will accept comments on the proposed regulations until October 1, 2019.
If you have any questions about this article, please contact a Boutwell Fay attorney.
© Boutwell Fay LLP 2019, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of July31, 2019.