One bad apple shouldn’t spoil the whole bunch.
That’s the thinking behind the Treasury Department/IRS’s new proposed regulation issued July 2, which would ease the damage potentially caused by a “bad apple” participating in a defined contribution multiple employer plan (MEP).
Here’s the gist: Currently, if one of the employers in a MEP screws up by providing bad or no data to a plan administrator, the entire plan can be disqualified, causing all of the MEP’s participants to lose the tax benefits associated with 401k plans.
Per the Treasury/IRS notice of proposed rulemaking:
The proposed regulations would provide an exception, if certain requirements are met, to the application of the “unified plan rule” for a defined contribution MEP in the event of a failure by an employer participating in the plan to satisfy a qualification requirement or to provide information needed to determine compliance with a qualification requirement. These proposed regulations would affect MEPs, participants in MEPs (and their beneficiaries), employers participating in MEPs, and MEP plan administrators.
The IRS and Treasury Department were charged with finding ways to expand access to MEPs by President Trump’s Aug. 31, 2018 Executive Order.
It specifically named MEPs as an efficient way to reduce administrative costs of retirement plan establishment and maintenance and would encourage more plan formation and broader availability of workplace retirement plans, especially among small employers.
Executive Order
The Executive Order directed the Secretary of the Treasury to “consider proposing amendments to regulations or other guidance, consistent with applicable law and the policy set forth in … this order, regarding the circumstances under which a MEP may satisfy the tax qualification requirements … including the consequences if one or more employers that sponsored or adopted the plan fails to take one or more actions necessary to meet those requirements.”
The July 2 proposed regulation is aimed at the concern that some employers are reluctant to join a MEP without an exception to the “one bad apple” rule, perceiving that benefits of joining a MEP are outweighed by the risk of plan disqualification based on the actions of an uncooperative participating employer.
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.
The notice is especially timely in light of the SECURE Act, which, if passed by Congress would expand the use of MEPs by offering features and low-cost funds that bill supporters say have typically been available only to larger retirement plans with greater assets and more purchasing power.
The provision in the act would also provide tax credits to small employers to join a pool and offer an open MEP to its employees.