IRS Issues Proposed Regulations Regarding Multiple Employer Plans:

On July 3, 2019, the IRS published proposed regulations affecting one specific rule governing multiple employer plans (“MEPs”). A MEP is a retirement plan that is maintained by more than one employer, which means that not all of the plan’s participating employers are part of the same controlled group or the same affiliated service group.

As background, since 2012 the main legal issue with MEPs has involved a divergence between the Internal Revenue Code (“Code”) and U.S. Department of Labor (“DOL”) guidance with respect to what constitutes a MEP. Specifically, under section 413(c) of the Code, a MEP is defined simply as a plan that is maintained by more than one employer. Under DOL guidance, however, there are additional requirements that a MEP must satisfy before the DOL will consider it a MEP and allow it to avail itself of certain MEP advantages (e.g., only one Form 5500 needs to be filed for the plan each year, rather than a separate Form 5500 needing to be filed for each participating employer). For example, for a plan to constitute a MEP, the DOL requires a common nexus between the plan’s participating employers, other than the fact that they are participating in the same plan.   

These new IRS proposed regulations do not address that divergence between the Code and DOL guidance. However, pursuant to President Trump’s August 31, 2018 Executive Order, these regulations do address a rule that has plagued MEPs for many years. Under the ‘‘unified plan rule’’ (which is commonly referred to in the industry as the “one bad apple rule”), the failure by one participating employer to satisfy an applicable tax qualification requirement can result in the disqualification of the MEP for all employers maintaining the plan.

Fortunately, the proposed regulations (which were drafted in consultation with the DOL) would provide an exception to the unified plan rule for certain defined contribution MEPs. Under the proposed regulations, a defined contribution MEP would be eligible for the exception to the unified plan rule on account of certain qualification failures resulting from action or inaction by a participating employer, if the following conditions are satisfied:

• The plan must satisfy certain eligibility requirements. First, the plan administrator must have established practices and procedures (formal or informal) that are reasonably designed to promote and facilitate overall compliance with applicable Code requirements, including procedures for obtaining information from participating employers. Second, the plan document must describe procedures that would be followed to address participating employer failures. Third, the plan cannot be “under examination” (e.g. it is not under an investigation by the IRS’s Employee Plans Division or its Criminal Investigation Division).
• The plan must satisfy certain notice requirements. As examples, the notice must inform an “unresponsive participating employer” about such employer’s failure, the remedial actions such employer would need to take to remedy the failure, and such employer’s option to initiate a spinoff of plan assets and account balances attributable to participants who are employees of that employer. An “unresponsive participating employer” is defined as a participating employer that fails to comply with: (1) reasonable and timely requests from the plan administrator for information needed to determine compliance with a tax qualification requirement; or (2) reasonable and timely requests from the plan administrator to take actions necessary for correcting a failure to satisfy a tax qualification requirement as it relates to the participating employer.  
• If the unresponsive participating employer fails to take appropriate remedial action with respect to its failure, the plan administrator must implement a spinoff of that employer’s assets in the plan.
• The plan administrator must comply with any information request that the IRS or a representative of the spun-off plan makes in connection with an IRS examination of the spun-off plan, such as an information request related to the participation of the unresponsive participating employer in the plan for years prior to the spinoff.

Also note that until these regulations are published as final regulations in the Federal Register, taxpayers cannot rely on the rules set forth in these proposed regulations.

Here is a link to the proposed regulations:  https://www.govinfo.gov/content/pkg/FR-2019-07-03/pdf/2019-14123.pdf