IRS Proposes Exception to Unified Plan Rule for Defined Contribution MEPs

The IRS has proposed regulations that would create an exception to the current rule treating a multiple employer plan (MEP) as disqualified in its entirety if any of the employers maintaining the plan fail to satisfy an applicable tax-qualification requirement. (That rule is sometimes called the “unified plan rule.”) The proposed exception responds to an August 2018 executive order (see our Checkpoint article) that directed the IRS to consider changes that would expand access to MEPs. Here are highlights of the proposed regulation.

• Conditions for Relief. The exception would be available only to MEP administrators with established practices and procedures that are reasonably designed to promote compliance with applicable Code requirements. A MEP’s plan document would need to describe how participating employer failures will be handled, including what the MEP administrator will do if the participating employer fails to take remedial action or requests a spinoff of its portion of the plan. Also, the MEP could not be “under examination,” a broadly defined concept that includes circumstances in which an agent reviewing a determination letter application identifies undisclosed possible qualification failures.
• Eligible Failures. The exception would apply to both known and potential qualification failures. A known failure is one identified by the MEP administrator that is attributable solely to one of the participating employers in the MEP. A potential failure is one that the MEP administrator believes to exist but cannot evaluate solely due to a participating employer’s failure to provide data, documents, or other information. A participating employer that fails to comply with the MEP administrator’s reasonable and timely requests for information or corrective action is considered an “unresponsive participating employer” under the proposed regulation.
• Notice Requirements. A series of three notices would have to be issued to an unresponsive participating employer according to a prescribed timetable. The first notice would describe the known or potential failure, necessary remedial actions, the employer’s option to initiate a spinoff, and the consequences of inaction. The second notice would repeat the content of the first, and add a warning that failure to act within 90 days will trigger notice to participants and the DOL. The third notice—also provided to the employer’s participating employees and the DOL—would repeat the content of the first notice, set a deadline for employer action, and describe the adverse consequences if the MEP administrator carries out a spinoff and termination of the employer’s portion of the plan.

• Corrective Action. An employer would have until 90 days after the third notice to take remedial action.

  • Potential Failures. A participating employer could take remedial action by providing information allowing the MEP administrator to determine whether a qualification failure exists or by initiating a spinoff. If employer-provided information established the existence of an uncorrected qualification failure, the MEP administrator could then implement the regulation for known qualification failures, disregarding any earlier actions and notices. The process for a known failure could not be accelerated by taking into account previous notices for potential failures.
  • Known Failures. A participating employer could correct a known failure (e.g., by making corrective contributions) or initiate a spinoff of its portion of the MEP.
• Spinoff/Termination. If the participating employer failed to timely take remedial action, the MEP administrator would have to stop accepting contributions from that employer, notify participants who are the employer’s employees that their portion of the MEP will be spun off and terminated, and then implement the spinoff and termination. While the spun-off plan would be treated as having the qualification failure that triggered the spinoff/termination, distributions from the spun-off plan would not lose their favorable tax treatment solely because of the participating employer’s failure. However, the IRS could pursue remedies against the responsible individuals, including treating their distributions as ineligible for rollover.

EBIA Comment: If finalized, the relief offered by these regulations may attract more employers to participate in MEPs, which can offer economies of scale that reduce administrative and asset management costs but currently present a meaningful risk that another employer’s actions will disqualify the entire plan. The proposal’s elaborate mechanism may lessen that risk, although its detailed requirements and deadlines could cause the relief to be lost if they are missed or misinterpreted. The IRS has invited public comment on the proposed regulation by October 1, 2019. The relief may not be used before it becomes final. The DOL has proposed separate regulations—also in response to the executive order—that would expand ERISA’s definition of employer to make it easier for groups or associations of employers, and certain professional employer organizations, to establish MEPs (see our Checkpoint article). Those interested in that proposal may want to follow the litigation challenging similar provisions in the DOL’s association health plan regulation (see our Checkpoint article). For more information, see EBIA’s 401(k) Plans manual at Sections II.F.2 (“Multiple Employer Plan”) and II.G.3 (“Plans for Workers of Professional Employer Organizations (PEOs)”).

Contributing Editors: EBIA Staff.