IRS Issues Proposed MEP Rule
Employers of all types have expressed interest in learning more about multiple employer plans (MEPs). But the unified plan rule, sometimes known as the “one bad apple rule,” has discouraged some employers from pursuing MEP participation. This rule treats a qualification failure by one participating employer as a MEP disqualification event for all employers maintaining the plan. To help expand access to MEPs, the IRS has released proposed regulations, which provide a welcome exception to the unified plan rule. The proposed regulations also withdraw prior proposed regulations that were originally issued in July 2019.
The new proposed regulations take into account comments received on the 2019 proposed regulations and contain guidance for a type of MEP known as a pooled employer plan (PEP), which was created by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).
How do MEPs Benefit Employers?
The MEP concept is simple: multiple employers may benefit from combining their retirement resources into a single plan rather than each employer establishing a separate plan. Each participating employer could save time and money by avoiding such things as individual annual plan audits, Form 5500 information returns, and ERISA bonds. Additionally, MEP participants may be able to enjoy some savings on plan investments once the plan reaches a certain size. Each employer in the MEP continues to be responsible for fulfilling certain fiduciary duties, but MEPs typically streamline administration by using a single plan administrator who assumes overall responsibility for plan compliance and for day-to-day operations.
What is the Unified Plan Rule Exception?
In addition to creating PEPs, the SECURE Act created a statutory exception to the unified plan rule for certain types of MEPs and directed the Treasury Secretary to issue specific guidance on this exception. As a result, MEPs can still retain their qualified status even if a participating employer fails to meet a qualification requirement. To qualify for the exception, the MEP must be a defined contribution plan or an IRA plan (i.e., employer-sponsored IRA, SEP plan, or SIMPLE IRA plan) maintained by employers either that have a common interest or—in the case of a PEP—that use a pooled plan provider (PPP). The MEP must also meet the following requirements.
Plan language requirements
The MEP document must detail the procedures that address a participating employer failure, including a description of the notices that the plan administrator will send—and when such notices will be sent. The document must also describe the actions that the plan administrator will take if an unresponsive participating employer (UPE) does not take appropriate action to either 1) correct the failure or 2) initiate a spinoff to a separate plan. (The IRS intends to publish model language for this purpose when it issues final regulations.) Finally, the document must include a statement explaining that if a UPE fails to take appropriate action in time, then the UPE’s participants will be fully vested in the amounts attributable to employment with that employer.
Plan administrator’s notice obligations
The MEP administrator may be required to provide three notices to a UPE regarding a qualification failure. The proposed regulations delineate notice requirements for both “a failure to provide information” and a “failure to take action.” (When a failure by a participating employer is initially a failure to provide information, but becomes a failure to take action, more than three notices may be necessary.)
- First notice requirements. The MEP administrator must provide the first notice when a participating employer becomes a UPE. If the UPE fails to provide information, the MEP administrator must provide the first notice within 12 months of the end of the plan year in which the failure occurred. If the UPE fails to take action, the MEP administrator must provide the first notice within 24 months of the end of the plan year in which the failure occurred. The first notice must describe the failure, the corrective actions that the UPE must take, the UPE’s option to initiate a spin off, and the consequences of failing to take action. These consequences include a prohibition on further contributions and adverse tax consequences for those responsible for the failure.
- Second notice requirements. If the UPE fails to provide information or to take action by the end of the 60-day period following the first notice, the MEP administrator must provide a second notice within 30 days. The second notice must contain the same information as the first notice and must include a statement explaining that the UPE’s failure to take corrective action within 60 days will trigger a notice to be sent to the UPE’s participants and to the Department of Labor (DOL).
- Third (final) notice requirements. If the UPE fails to provide information or to take action by the end of the 60-day period following the second notice, the MEP administrator must send a final notice to the UPE, the UPE’s participants, and the DOL. The MEP administrator must send the notice within 30 days after the end of the second 60-day period. The final notice must contain all the information from the first notice, the final deadline for the UPE to take action, and a statement that the notice is being provided to the UPE’s participants and to the DOL.
The 2019 proposed regulations contained a 90-day waiting period between notices. Industry groups urged the IRS to shorten the proposed time frames, which would have resulted in at least a nine-month wait before any action could be taken. As a result, the proposal shortened the waiting period to 60 days, which accelerates the notification process. The IRS also removed the requirement that the plan not be under IRS examination before the first notice is sent to the UPE. Instead, the IRS signaled that it would work with the DOL to allow corrections of operational failures—those that involve a failure to timely provide the first notice—under the IRS’s Employee Plans Compliance Resolution System.
As previously mentioned, a MEP administrator may be required to provide more than three notices when it discovers that a participating employer has incurred both a failure to provide information and a failure to take action. For example, let’s say that a MEP administrator asks for census data on a participating employer’s employees. The participating employer does not respond, causing a failure to provide information. As a result, the MEP administrator provides a first notice—and after the UPE fails to respond again—provides a second notice. After receiving the second notice, the UPE provides the requested information to the MEP administrator. Based on the UPE’s response, the MEP administrator determines that eligible employees were improperly excluded from the UPE’s plan, resulting in a failure to take action.
Instead of having to start over by sending a first notice for the failure to take action, the MEP administrator can combine the first and second notices if the MEP administrator 1) requests the UPE to take action as soon as practicable, and 2) provides the combined notice not later than 24 months after the end of the plan year in which the failure occurred.
Pooled plan provider’s required duties
The SECURE Act added pooled plan provider responsibilities both in Internal Revenue Code Sec. 413(e) and in ERISA Sec. 3(44). These parallel provisions and the proposed regulations require that PPPs
- designate and acknowledge in writing that the PPP is a named fiduciary and plan administrator under ERISA,
- act as the person responsible to perform all administrative duties to ensure that the plan meets Internal Revenue Code and ERISA requirements,
- ensure that all those who handle plan assets or act as plan fiduciaries meet ERISA’s bonding rules, and
- register as a pooled plan provider.
To take advantage of the unified plan rule exception, the proposed regulations reiterate that PPPs must perform all of the required administrative duties that employers normally perform. These duties include
- monitoring compliance with plan terms, the Internal Revenue Code, and ERISA;
- maintaining accurate plan data (such as participant and beneficiary information);
- performing nondiscrimination testing;
- processing all employee transactions;
- updating the plan document to reflect statutory changes (if this task has been delegated to the PPP); and
- satisfying Internal Revenue Code and ERISA notice and reporting requirements—including filing Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. and Form 5500, Annual Return/Report of Employee Benefit Plan).
When determining whether an individual meets the PPP requirements, the proposed regulations state that under the aggregation rules, all individuals who perform services and are treated as a single employer are also treated as one person.
What Actions Should be Taken Following a Participating Employer Failure?
Once the MEP administrator has notified the UPE of the failure, the UPE has until the end of the 60-day period following the date that the MEP administrator provided the final notice to either correct the failure or to initiate a spinoff. To correct a failure to provide information, the UPE must provide the required data, documents, or other information requested by the MEP administrator. To correct a failure to take action, the UPE must complete the action requested by the MEP administrator.
If the UPE instead chooses to initiate a spinoff, the UPE must direct the MEP administrator to spin off amounts attributable to the UPE’s participants into a separate single employer plan that is similar to the MEP. The MEP administrator must complete the spinoff as soon as practicable. (This requirement is satisfied if the plan is spun off within 180 days following the UPE’s direction.) The proposed regulations note that spinning off the plan (versus correcting the failure) does not cure the failure, so the IRS may still pursue appropriate remedies against the responsible parties. The IRS has asked for comments on whether it would ever be appropriate for participants’ accounts to stay in the MEP instead of moving to the UPE’s new plan as part of the spinoff.
If a UPE fails to take appropriate action or to initiate a spinoff within 60 days after the final notice is provided, the MEP administrator must
- stop accepting contributions from the UPE and its participants,
- provide a notice to the UPE’s affected participants, and
- provide the affected participants with an election regarding treatment of their accounts.
The notice to the affected participants must explain that
- no future contributions will be made,
- the amounts attributable to their employment with the UPE will become fully vested, and
- participants will receive more information about their accounts.
Affected participants can choose either to keep their assets in the MEP or to directly roll over the assets to an eligible retirement plan. If a participant fails to make an election, the assets will remain in the MEP, subject to plan requirements. Participants who elect to keep their assets in the MEP must have a distributable event before they can take a distribution at a later date. If a participant keeps her assets in the MEP and later incurs a severance of employment, the MEP administrator may rely on the participant’s representation that there was a severance—unless the MEP administrator has actual knowledge to the contrary.
The proposed regulations provide important MEP improvements. In addition to clarifying the exception to the unified plan rule, this guidance expedites the notification process and details the steps that a PPP must follow to take advantage of the unified plan rule exception. The IRS will consider reliance on the proposed regulations—even though they are not effective yet—as a good faith interpretation of IRC Sec. 413(e), which provides the MEP and PPP requirements. MEP administrators and PPPs may want to become familiar with the notification process and other obligations that they may be required to meet.
The IRS is currently accepting comments on the proposed regulations until May 27, 2022, and a public hearing has been scheduled for June 22, 2022. Ascensus will continue to monitor and analyze related guidance as it is released. Visit FuturePlan.com for future updates.
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