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Proposed Regulations Would Implement SECURE Act Changes to Unified Plan Rule


· 7 minute read


· 7 minute read

Multiple Employer Plans, 26 CFR Part 1, 87 Fed. Reg. 17225 (Mar. 28, 2022)

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The IRS has proposed regulations detailing how multiple employer plans (MEPs) may avoid disqualification after a participating employer fails to take an action necessary to preserve the plan’s tax qualification. Generally, under Code § 413(c), tax-qualified retirement plans (including 401(k) plans) maintained by more than one employer must apply certain qualification rules as if all of the participating employers were a single employer. Because of that “unified plan rule,” a MEP can be disqualified in its entirety if any of the employers maintaining the plan fail to satisfy certain tax-qualification requirements. In 2019, the IRS proposed a regulatory exception to the unified plan rule (see our Checkpoint article), but those regulations were never finalized because, shortly thereafter, Congress enacted a statutory exception to the unified plan rule in the SECURE Act (see our Checkpoint article). That exception, located in Code § 413(e), applies only to (1) plans maintained by employers that have a common interest other than having adopted the plan, and (2) plans maintained by a “pooled plan provider” for participating employers that lack any other common interest. The exception authorizes the Treasury Secretary to adopt regulations implementing the Code § 413(e) exception, including rules regarding the duties of pooled plan providers and the procedures for applying the statute’s primary remedy for dealing with employers who jeopardize a MEP’s qualification: removing from the MEP the assets attributable to employees of the “unresponsive participating employer.”

The new proposed regulations’ implementation of the statutory exception is in many respects similar to the IRS’s previous proposal (which is withdrawn). Here are highlights:

  • Notices to Unresponsive Participating Employers. As under the IRS’s previous proposal, the centerpiece of the exception would be a series of notices to participating employers who fail to take an action needed to satisfy a qualification requirement that has been reasonably requested by the MEP’s plan administrator, or fail to provide information that the MEP’s plan administrator reasonably believes is necessary to determine whether the plan is in compliance.

    • The first notice would describe the participating employer’s failure, necessary remedial actions, the consequences if the employer fails to take appropriate action, and the employer’s option to spin off amounts attributable to its employees to a separate, single-employer plan.
    • If the participating employer does not take remedial action or initiate a spinoff within 60 days, a second notice would have to be sent within 30 days, repeating the content of the first, and warning that failure to act within 60 days will trigger a final notice that must also be provided to participants and the DOL.
    • If the participating employer does not take remedial action or initiate a spinoff within 60 days after the second notice, a final notice would have to be sent within 30 days, repeating the content of the first notice, and specifying the final deadline—60 days after the date of the final notice—for the participating employer to take remedial action or initiate a spinoff. The final notice would have to be furnished to participants employed by the unresponsive employer and to the DOL.
  • Failures to Provide Information That Become Failures to Take Action. If a participating employer cures a failure to provide information, but then fails to take required action, notices given for the information failure would not satisfy the notice requirements for the failure to act. To accelerate the process, however, a MEP plan administrator who sent the second notice for the information failure could send a combined first and second notice for the failure to act if certain timing requirements were met and the combined notice satisfied the applicable content requirements.
  • Employer-Initiated Spinoff. If a participating employer initiates a spinoff, the MEP plan administrator must implement and complete that spinoff as soon as reasonably practicable, a requirement that will be deemed met if the spinoff is completed within 180 days.
  • Consequences After Final Notice. If the final deadline for correction or an employer-initiated spinoff passes, the MEP administrator must stop accepting contributions from the unresponsive participating employer and its employees, provide specified information to the affected participants (and their beneficiaries), and give participants and beneficiaries an election to either have their account balances remain in the MEP or be directly rolled over to an eligible requirement plan (to the extent the balances qualify for rollover). If there is no affirmative election, the individual will be treated as having elected to have the benefit remain in the MEP. A participant’s balance could not remain in the plan, however, to the extent the plan’s terms would require a mandatory distribution upon the participant’s severance from employment. Additional rules address when distributed amounts must be directly rolled over, and when amounts must be paid directly to the individual.
  • Obligations of MEP Plan Administrator. A MEP plan administrator cannot use the Code § 413(e) exception unless it meets the notice requirements, implements any spinoff requested under the regulations by an unresponsive participating employer, and when required, takes the specified actions after a participating employer fails to timely take remedial action or initiate a spinoff after receiving a final notice. MEP plan administrators who are also pooled plan providers must also perform substantially all of the administrative duties specified for such providers.
  • Plan Terms. The MEP plan document would have to state the notice procedure that must be followed when a participating employer failure occurs, the deadline by which the administrator must give the first notice (which differs depending on the type of failure), the administrator’s obligations if the final deadline passes and the employer does not take remedial action, and that, after the final deadline, all amounts attributable to employment with the unresponsive participating employer will be fully vested as if the plan had terminated. For purposes of the exception, if a plan did not separately account for amounts in a participant’s account attributable to different employers, all amounts would be considered attributable to the unresponsive employer if the participant were currently employed by that employer. But if a participant’s balance included amounts from a current employer who was not the unresponsive employer, the balance would be attributed entirely to the current employer.
  • Plans Eligible for the Exception. The exception would apply to tax-qualified defined contribution plans and to certain employer-sponsored IRAs, including SEP IRAs and SIMPLE plans.
  • Applicability Date; Reliance. The regulations are proposed to apply from the date they become final. Until then, employers may rely on a good faith, reasonable interpretation of the statutory rules. Acting in accordance with the proposed regulations will be considered such an interpretation.

EBIA Comment: While these proposed regulations incorporate much of the IRS’s 2019 proposal, various important details have changed. For example, the notice timing requirements have been shortened, and MEPs are not barred from using the exception if they are under examination. (Whether an examination of the plan has commenced may, however, affect which EPCRS program can be used to correct a MEP administrator’s failure to timely provide the first notice.) The statute directs the IRS to create model plan language that could be used to satisfy the requirements of the exception and qualify as a plan with a pooled plan provider, but the IRS does not intend to publish that model language until after the final regulations are issued. Comments have been requested on various issues, including whether additional guidance is needed regarding how to determine whether employers have a common interest other than their participation in the MEP—a topic that is not addressed in the proposed regulations. Comments must be provided by May 27, 2022. For more information, see EBIA’s 401(k) Plans manual at Section II.F.2 (“Multiple Employer Plans (MEPs)”).

Contributing Editors: EBIA Staff.

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