By Pension and Benefits Editorial Staff
The IRS has issued proposed regulations that would provide an exception to the unified plan rule for defined contribution multiple employer plans (MEPs), if certain conditions are met. The purpose is to reduce the risk of plan disqualification due to noncompliance by other participating employers. The regulations are proposed to apply on or after the publication date of final regulations in the Federal Register. They cannot be relied upon until then.
Multiple employer plans. A MEP is a single plan adopted by multiple unrelated employers. Multiple employer plans under Code Sec. 413(c) can be structured in one of two ways:
- as an open MEP where an organization with employees takes the lead by establishing the plan for its own employees, and has other unrelated employers join the plan as co-sponsors;
- as a closed MEP in which a group or association of employers that meets a commonality requirement takes the lead in establishing the plan, and members are free to adopt it.
Open MEPs are often established by organizations that specialize in providing benefits for smaller employers. Typically, these are 401(k) plans. Note that MEPs are distinct from union multiemployer plans governed by Code Sec. 413(b), but share some of the same rules.
MEP unified plan rule. Under current regulations for both MEPs and multiemployer plans, a qualification or operational failure by one employer can result in a total plan failure for all participating employers. By creating an exception to the unified plan rule, the proposed regulations would ensure that, in certain circumstances, compliant participating employers will continue to maintain a qualified plan. According to the IRS, the proposed regulations are expected to encourage the establishment of new defined contribution MEPs and increase the participation of employers in existing defined contribution MEPs.
Proposed exception. Under the proposed regulations, an eligible defined contribution MEP would qualify for an exception to the unified plan rule because of certain qualification failures due to actions or inaction by a participating employer, if certain conditions are met. The exception would be available if the participating employer is responsible for a qualification failure that it is unable or unwilling to correct. It would also be available if the participating employer is nonresponsive to the plan administrator’s reasonable and timely requests for information or for action.
For the exception to apply, certain actions must be taken, including, in certain circumstances, the MEP plan administrator under the terms of the plan spinning off the assets and account balances attributable to employees of a noncompliant participating employer into a separate plan and then terminating of the plan. However, a spinoff can be either a spinoff initiated by the unresponsive participating employer and implemented by the plan administrator, or a spinoff-termination implemented by the plan administrator.
Requirements for exception. Under the proposed exception, a defined contribution MEP would not be disqualified on account of a participating employer failure provided that the following conditions are satisfied:
- the MEP satisfies certain eligibility requirements including established practices and procedures to promote compliance and a requirement to adopt relevant plan language;
- the MEP plan administrator provides notice and an opportunity for the unresponsive participating employer to take remedial action to remedy the participating employer’s failure;
- the administrator implements a spinoff in the event the unresponsive participating employer fails to take appropriate remedial action; and
- the administrator complies with any information request by the IRS or a representative of the spun-off plan made in connection with an IRS examination of the spun-off plan, including any information request related to the participation of the unresponsive participating employer in the MEP for years prior to the spinoff.
Participating employer failures would include both known compliance failures, and failure to provide information to the MEP plan administrator so that the administrator can determine whether there is an actual plan or operational failure.
Notice requirements. The proposed regulations would require a Code Sec. 413(c) plan administrator to send up to three notices informing an unresponsive participating employer of the participating employer failure and the consequences if the employer fails to take remedial action or initiate a spinoff from the defined contribution MEP. After each notice is provided, the employer has 90 days to take appropriate remedial action or initiate a spinoff from the defined contribution MEP. If the employer acts after the first or second notice, subsequent notices are not required. However, if the employer takes no action, a third notice will be sent to the unresponsive employer and also will be provided to plan participants who are employees of the unresponsive participating employer and to the Department of Labor.
After the third notice is provided, the plan administrator is required to implement a spinoff of the plan assets attributable to employees of an unresponsive participating employer and must provide notification of the spinoff-termination to participants who are employees of the unresponsive employer. In addition, under the proposed regulations, any spinoff or spinoff-termination from a defined contribution MEP must be reported to the IRS (in accordance with forms, instructions, and other guidance).
SOURCE: 84 FR 31777.
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