The IRS has issued proposed regulations that would apply to defined contribution multiple employer plans (MEPs) in REG-121508-18[1] in response to an executive order[2] issued by the President in August 2018.  The EO directed the IRS and related agencies to take actions to encourage the use of MEPs, specifically to limit the consequences should one of the employers participating in the MEP fail to take actions required to allow the plan to remain qualified.

Concerns had been expressed that the above rule (often referred to as the “one bad apple rule” and officially referred to as part of the overall unified plan rule) discouraged employers from joining an MEP plan, since the actions of an unrelated employer over which they would have no control could jeopardize the qualified status of the plan, putting the innocent employer and its employees at risk for the tax consequences of plan disqualification.[3]

Retirement plans and sponsoring employers must comply with certain requirements in order for the retirement plan to receive the tax favored qualified plan status.  A MEP allows multiple employers to join together in a single plan, hopefully reducing the costs of administering a plan that must be born by the employers compared to sponsoring their own independent retirement.

MEPs are specifically authorized by IRC §413(c). Reg. §1.413-2(a)(3)(iv) provides that, for purposes of determining the qualified status of an MEP, all employers that are part of the plan are considered, including actions that they take or fail to take (the “unified plan rule”).  The preamble notes:

Consequently, §1.413-2(a)(3)(iv) provides that “the failure by one employer maintaining the plan (or by the plan itself) to satisfy an applicable qualification requirement will result in the disqualification of the MEP for all employers maintaining the plan.” Section 1.416- 1, Q&A G-2, includes a similar rule relating to the qualification of a MEP, providing that a failure by a MEP to satisfy section 416 with respect to employees of one participating employer means that all participating employers in the MEP are maintaining a plan that is not a qualified plan.[4]

The preamble outlines the general structure of the relief that would be provided if the proposed regulations are adopted without change in final form:

Under the proposed regulations, a defined contribution MEP would be eligible for the exception to the unified plan rule on account of certain qualification failures due to actions or inaction by a participating employer, if the conditions set forth in the proposed regulations are satisfied. The exception generally would be available if the participating employer in a MEP is responsible for a qualification failure that the employer is unable or unwilling to correct. It would also be available if the participating employer fails to comply with the section 413(c) plan administrator’s request for information about a qualification failure that the section 413(c) plan administrator reasonably believes might exist. For the exception to the unified plan rule to apply, certain actions are required to be taken, including, in certain circumstances, a spinoff of the assets and account balances attributable to participants who are employees of such an employer to a separate plan and a termination of that plan.[5]

That is, the MEP would be able to kick out the uncooperative employer by moving the assets related to that employer and the accounts in question to a separate plan that would then be treated as terminated if, in fact, the employer refuses to cooperate and take necessary remedial actions. 

That would create issues for the uncooperative employer and its employees, but it would preserve the qualified status of the MEP for the other employers who were not out of compliance.

The proposed regulations would add subsection (g) to Reg. §1.413-2 that would contain the rules for qualification of an MEP, as well as the steps to be taken to avoid the impact of the one bad apple rule.  As well, the IRS has reserved guidance in two additional subsections added to Reg. §1.413-2 ((e) and (f)).

The regulations would apply on and after the date they are published in final form in the Federal Register. Taxpayer are not allowed to rely upon these rules prior their publication in final form (that is, the one bad apple rule will be in full force until such time).[6]

Note the SECURE Act, which was passed by the House in May but has not yet cleared the Senate, has its own similar provisions to remove the one bad apple rule for MEPs and create “pooled plans” to encourage wider adoption of qualified retirement plans by employers by reducing administrative costs.[7]  If that bill eventually passes the Senate and is signed into law, presumably the IRS will adjust these proposed regulations as necessary to take into account the language in that bill.

[1] REG-121508-18, 7/3/19, https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-14123.pdf?utm_source=federalregister.gov&utm_medium=email&utm_campaign=pi+subscription+mailing+list, retrieved July 2, 2019

[2] Executive Order 13847 (83 FR 45321 (Sept. 6, 2018)), 8/31/18

[3] REG-121508-18, 7/3/19, https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-14123.pdf?utm_source=federalregister.gov&utm_medium=email&utm_campaign=pi+subscription+mailing+list, retrieved July 2, 2019, p. 6

[4] Ibid, p. 5

[5] Ibid, p. 8

[6] Ibid, p. 21

[7] SECURE Act, Section 101, as passed by the House of Representatives