Recent proposed regulation changes from the IRS include a possible exception to the “unified plan rule” for defined-contribution multiple employer plan. This exception would occur if certain conditions are met and one participating employer fails to meet plan qualification requirements or fails to provide the information necessary to determine compliance with qualification requirements.
Currently, multiple employer plans (MEPs) are retirement plans with participating employers treated as a single employer under the regulations for purposes of qualification requirements. Defined-contribution MEPs are plans that provide an account for each plan participant. Benefits are based on the amount contributed to the account by the individual and their employer. Any income to the plan, as well as other gains and losses, are allocated to each participant’s account. Under the current rule, commonly called the “one-bad-apple” rule, to qualify as a MEP, all participating employers must qualify. If one employer fails to satisfy any qualification requirements, then the entire MEP fails to be a qualified plan.
A year ago, President Trump issued an Executive Order that outlined several steps to expand and improve workplace retirement coverage. This order directed the IRS to propose regulations so that MEPs can satisfy tax qualification requirements even if one or more employers sponsoring the MEP fail to meet the qualification requirements or provide qualification paperwork.
According to the new regulations the IRS proposed, there would be an exception to the unified plan rule for defined-contribution MEPs if there were certain qualification failures that came from the actions, or inactions, of participating employers. These qualifying conditions to fall under this exception include:
- Spin-off: A defined-contribution MEP must “spin-off” into a separate plan the individual accounts of employees whose employer is non-responsive to qualification requirements if that failure has not been corrected first by remedial action.
- Compliance: In order to qualify for an exception, the MEP would first have to put in place procedures designed to encourage compliance with the necessary qualification information. The plan document must be amended to include procedures that will be used in the event of employer failure.
- Notice: Under the new regulations, the plan administrator must give three notices to the unresponsive employer. As part of the third notice, the plan administrator must also include notice to employee participants and beneficiaries. Further, a defined-contribution MEP must not be under examination when the first notice is provided to an unresponsive employer. The employer has 90 days to respond to the qualification failure notice, time to either take the appropriate action to remedy the issue or initiate a spin-off.