IRS Issues Proposed Regulations on Multiple Employer Plan “One Bad Apple” Exception

On March 25, 2022, the IRS proposed regulations regarding certain multiple employer plans (MEPs). The proposed regulations provide guidance on an exception to the unified plan rule for MEPs in the event of a failure by one or more participating employers to comply with applicable Code requirements. Additionally, the IRS withdrew 2019 proposed regulations that amended the application of the unified plan rule to MEPs.

Under the unified plan rule (also known as the “one bad apple” rule), the qualification of a MEP applies to all participating employers. Therefore, the failure of one employer to satisfy an applicable qualification requirement will result in the disqualification of the MEP for all participating employers.

The Setting Every Community Up for Retirement Enhancement Act of 2019 created a statutory exception to the unified plan rule for certain types of MEPs. If specified conditions are met, the plan will not be treated as failing to meet the applicable Code requirements merely because one or more participating employers fail to take necessary compliance actions. The exception applies to defined contribution plans maintained by employers with a common interest (other than having adopted the plan) or a pooled plan provider (PPP). If a plan has a PPP during the year of a participating employer failure, the exception will not apply unless the PPP substantially performs all the administrative duties required of the PPP for the year.

Under the exception, the plan must provide that plan assets attributable to employees of an employer that fails to take necessary action to meet qualification requirements must be transferred to a single plan maintained only by that employer (unless the regulators determine it is in the best interest of the employees to retain the assets in the MEP). Generally, the employer failing to act (and not the plan or any other employer in the plan) will be liable for any liabilities concerning the plan attributable to employees of that employer.

The proposed regulations provide guidance on implementing this exception to the unified plan rule. Under this guidance, the MEP plan document language must describe the procedures to address participating employer failures. The procedures must explain the notices that the MEP plan administrator will send to an “unresponsive” employer by specified deadlines depending on the type of failure. The proposal outlines notice requirements for both employer failures to provide information (e.g., requested data or documents) and failures to take necessary action (e.g., to make corrective contributions). For a failure to act, delivery of three notices to the employer at 60-day intervals may be required, with the final notice also being sent to impacted participants and the DOL. The notified employer can either take appropriate action to address the failure or initiate a spin off to a single employer plan within 60 days after the final notice is provided.

The plan terms must also describe actions the plan administrator will take if the unresponsive employer does not address the failure or initiate the spin off transaction by this deadline. In such an event, the plan language must state that employees of the unresponsive participating employer have a non-forfeitable right to the amounts credited to their accounts, determined in the same manner as if the plan had terminated. The IRS expects to issue model language with the final rule. The MEP plan administrator must also stop accepting contributions from the participating employer and participants, provide notice to affected participants, and as applicable, provide participants with an election regarding the treatment of their accounts.

Employers who participate in MEPs should be aware of the proposed regulations and should consult with their advisors for further information. The DOL requests comments by May 27, 2022, and encourages electronic submission in accordance with the specified instructions. A public hearing on the proposed regulations has been scheduled for Wednesday, June 22, 2022.

IRS Proposed Regulation – Multiple Employer Plans »