Just-released IRS proposed regulations would make it easier for employers to participate in defined contribution (DC) multiple-employer plans (MEPs). If certain conditions are satisfied, the proposal would provide relief from the “one bad apple” rule, which says a violation of the plan qualification rules by one participating employer can jeopardize the entire MEP’s tax-qualified status. The regulations won’t take effect until finalized and cannot be relied on in the meantime. Comments on the proposal are due Oct. 1.
Both “open” MEPS sponsored by unrelated employers and “closed” MEPs sponsored by related employers are subject to the one-bad-apple rule (called the “unified plan rule” in the proposal). However, the rule is often perceived as a greater deterrent to open MEPs due to the lack of control among unrelated participating employers.
Highlights of relief. The proposal would allow a DC MEP to avoid disqualification for a failure by an “unresponsive participating employer” (UPE) — one that is unwilling or unable to correct the failure or unresponsive to inquiries from the MEP’s administrator about a potential failure. The relief would be available if the following conditions are satisfied:
Relief unavailable if plan under examination. The relief would not be available to a MEP that is under examination or criminal investigation by IRS on the date when the first notice is provided to the UPE. For this purpose, IRS treats a MEP as being “under examination” if it has been notified of a pending examination or is aggregated for nondiscrimination testing with another plan that is under examination.
Reporting spinoffs to IRS. The MEP administrator would have to report any spinoff or spinoff-termination from a MEP to IRS (in accordance with forms, instructions and other guidance). IRS anticipates issuing a new form or revising an existing one for this purpose.
Qualification of spun-off plan. When a plan is spun off by either the UPE or the plan administrator, any qualification failure will be a failure with respect to the spun-off plan, not the MEP. If the plan administrator initiates a spin-off termination, distributions made from the spun-off plan would not lose eligibility for rollover solely because of the qualification failure.
Comments are due Oct. 1. IRS requests comments on several areas of the proposal, including:
IRS is also requesting comments on steps that DOL should take to help implement these regulations. DOL has noted that a plan administrator implementing a spinoff may be concerned about its fiduciary responsibilities and potential prohibited transactions. IRS encourages commenters to address these issues and will forward copies of those comments to DOL.
The proposal comes in response to a 2018 executive order (EO) from President Trump directing Treasury and DOL to expand access to workplace retirement plans. The EO specifically mentions expanding access to MEPs, saying these plans are “an efficient way to reduce administrative costs of retirement plan establishment and maintenance and would encourage more plan formation and broader availability of workplace retirement plans, especially among small employers.”
DOL finalizing relief from common nexus rule. The EO also directs DOL to relax another significant hurdle to MEPs: the “common nexus” requirement. This rule says a MEP's participating employers must have a genuine organizational relationship unrelated to providing benefits. DOL last year proposed to relax this requirement by also allowing MEPs established by:
The final DOL rule is currently under review by Office of Management and Budget’s Office of Information and Regulatory Affairs.
Congress working on open MEPs. While DOL’s rule would stop short of allowing open MEPs, legislation pending in Congress — including the House-passed Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (HR 1994) — would permit unrelated employers to offer DC open MEPs known as “pooled employer plans
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