The U.S. Treasury Department has released proposed regulations that relax the “unified plan rule” for multiple employer plans (MEPs). Published on July 3, 2019, this guidance was prompted by a 2018 Executive Order that directed the Treasury Department to consider proposing guidance that would expand workplace retirement plans for American workers. This Order specifically noted that providing greater access to MEPs would help achieve this goal. The new rules would provide relief for defined contribution MEPs that include a participating employer that jeopardizes the plan through failure to comply with certain qualified plan rules. Under the existing rules, one noncompliant employer within a MEP can disqualify the entire plan, creating significant problems for the other participating employers. If these proposed regulations become final, they will remove an important compliance hurdle for employers considering—or already in—a MEP.
Why are MEPs Important?
Multiple employer plans generally allow two or more employers to participate in a single retirement plan, which may result in simpler plan administration and reduced costs. These businesses may, for example, have some common ownership that allows—but does not require—the companies to share a single plan. Recognizing the potential benefits of MEPs, the Department of Labor (DOL) and federal legislators have also proposed expanding access to these plans.
The MEP concept is simple: some employers may benefit from combining their retirement resources into one plan. Instead of each employer establishing, maintaining, and paying for a separate qualified plan, many employers can participate in a single plan. This means that each participating employer could save time and money by avoiding individual annual plan audits, IRS Form 5500 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 participating employer still owes certain fiduciary duties to plan participants, but MEPs typically streamline administration by using a single plan administrator, who assumes overall responsibility for plan compliance and for day-to-day operations.
How Would the Proposed Regulations Help Employers with MEPs?
For the past 40 years, Treasury Regulations have dictated 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.” This unified plan rule, sometimes called the “one bad apple rule,” may well have discouraged individual employers from participating in a MEP. The proposed regulations provide an important exception to the unified plan rule. But this relief, if made final, will require the MEP plan administrator to follow a rigorous notification process and extensive follow-up.
Requirements for the Unified Plan Rule Exception
The proposed regulations cite four conditions that the MEP must satisfy in order to avoid plan disqualification on account of a participating employer’s failure. These conditions, listed below, will be described in more detail throughout this Washington Pulse.
- The MEP must satisfy the general eligibility requirements:
- The MEP plan administrator must have processes and procedures that are designed to promote overall plan compliance.
- The MEP plan document must describe the steps that the MEP plan administrator would take to address a participating employer’s compliance failure.
- The MEP must not be “under examination” by the IRS.
- The MEP plan administrator must provide detailed notices to the “unresponsive participating employer”—and if no action is taken, to plan participants (and their beneficiaries) and to the DOL’s Employee Benefits Security Administration (Office of Enforcement)—describing the failure and possible remedies.
- If the participating employer does not remedy the failure or spin off the assets held on behalf of its participants to a single employer plan, then the MEP plan administrator must spin off of those assets into a single employer plan and terminate such plan.
- The MEP plan administrator must comply with any IRS information request in connection with the spun-off plan assets.
Important MEP Compliance Provisions
The Treasury Department crafted these regulations to promote compliance and to increase coverage of employees by workplace retirement plans. To do so, it has proposed an exception to the unified plan rule, as discussed above, to ensure overall qualification of a MEP plan in spite of the action or inaction of one or more individual participating employers. To achieve its objective, Treasury’s proposed regulations—created in cooperation with the DOL—include many detailed requirements.
The MEP plan administrator must create a compliance process—and must include procedures in plan documents. The proposed regulations state that the MEP plan administrator must establish procedures that are designed to promote compliance with federal rules. The proposed regulations also require that the MEP defined contribution plan document itself contain the procedures that the MEP plan administrator will use to address participating employer failures, including failures to take appropriate remedial action. Fortunately, once final regulations are issued, the IRS intends to release a model plan amendment, which will provide clear direction about exactly how much procedural detail must be placed in the plan document.
The MEP plan administrator must provide certain notices. A participating employer becomes an “unresponsive participating employer” when it fails to comply with reasonable MEP plan administrator requests for compliance information—or when it fails to correct a compliance deficiency. At this point, the MEP plan administrator must provide a first notice to this employer, describing
- the participating employer failure;
- the remedial actions needed to fix the failure;
- the employer’s option to initiate a spinoff of the assets and account balances of its participants; and
- the consequences of failing to remedy the failure, including an involuntary spinoff of the assets and account balances of the employer’s participants, followed by a termination of that spun-off plan.
The MEP plan administrator must provide a second notice if the unresponsive participating employer fails to take remedial action within 90 days of the first notice. This second notice must be provided within 30 days after the first 90-day period ends. The second notice must include all of the information contained in the first notice. But it must also specify that the employer must remedy the failure (or spin off the assets) within 90 days, or the MEP plan administrator will send a notice to the DOL and to the unresponsive participating employer’s plan participants (and their beneficiaries), telling them of the participating employer’s failure and of the consequences of not correcting that failure.
The proposed regulations require a third notice if the employer takes no remedial action within 90 days of the second notice. The MEP plan administrator must provide this notice within 30 days after the second 90-day period ends. The MEP plan administrator must, however, also provide the notice to the unresponsive participating employer’s plan participants (and their beneficiaries) and to the DOL. This notice must include the information required to be in the first notice, plus
- the deadline for employer action,
- an explanation of any adverse consequences that a spinoff/termination could create for participants, and
- a statement that the MEP plan administrator is sending the notice to the unresponsive employer’s participants (and beneficiaries) and to the DOL.
- Spin off and termination. If the unresponsive participating employer doesn’t fix the compliance failure or spin off its participants’ assets, the MEP plan administrator must
- notify the affected participants (and their beneficiaries) about the spin off-termination details,
- notify the IRS (further guidance is expected),
- stop accepting contributions,
- implement a spinoff of the affected participants’ assets to a separate single-employer plan, and
- terminate the spun-off plan.
- Qualification of spun-off plan. The unified plan rule exception in the proposed regulations does not protect the unresponsive participating employer’s plan. Even though the MEP plan may have remained qualified at the time of the spinoff, the spun-off plan’s failure while still part of the MEP will be considered a qualification failure once it has been spun off. Further, the IRS may pursue adverse action against the owner of the participating employer or against any other responsible parties.
- Favorable tax treatment of participants’ assets upon termination. Generally, assets that are distributed because of the participating employer’s failure will still be treated as eligible rollover distributions.
The Treasury Department is Seeking Comments
With these proposed regulations, the Treasury Department has tried to balance the need for efficient plan administration with the ultimate aim of protecting plan participants and their beneficiaries. Accordingly, it is seeking comments from the public until October 1, 2019, particularly on whether
- the exception to the unified plan rule should be extended to defined benefit plans,
- the regulations should include additional requirements for MEPs to be eligible for the exception,
- the notice requirements should be simplified or the notice period shortened, and
- there are steps that the DOL should take to help implement the regulations.
The Proposed Regulations and Future MEP Developments
As written today, the proposed regulations provide an important improvement for MEPs. They will protect other participating employers from plan disqualification arising from one “bad apple.” But they cannot be relied on until they are made final. In addition, the regulations do not broaden the base of employers that are eligible to adopt a multiple employer plan.
Pending legislation and proposed DOL guidance could soon alter the MEP landscape. The final DOL “Association Retirement Plan” regulations are expected to be released soon. Like the proposed regulations, the final regulations are expected to provide much needed clarity and would allow a somewhat broader segment of employers to adopt MEPs. The U.S. House of Representative’s Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019—which enjoys bipartisan support—would eliminate the current commonality requirement, thereby creating “open MEPs.” If it becomes law, employers may find it easier to become part of a MEP. So while the Treasury’s proposed regulations may not significantly increase MEP usage on their own, as part of a larger movement toward greater MEP accessibility, they certainly could prove helpful to employers.
Ascensus will closely monitor any new developments regarding this guidance. Visit ascensus.com for future updates.