Multiple employer plans (“MEP”) provide a means for small employers to provide benefits to employees by sharing administrative time and expenses with other employers.
But the “one bad apple” rule (or “unified plan rule”) deters employers from participating in a MEP. Under this rule, if one employer in the MEP does not meet qualification requirements, or provide information to determine it meets qualifications, the entire MEP is disqualified. However, change may be on the horizon. This summer, in response to Executive Order 13847 Strengthening Retirement Security in America, the IRS issued a proposed rule that provides an exception to the one bad apple rule.
If the rule is adopted, a MEP would not be disqualified by a single employer’s lack of qualification if the MEP satisfies the following four conditions:
1. The MEP satisfies certain eligibility requirements
2. The plan administrator provides notice to the unresponsive employer. The proposed rule outlines three notices to be provided:
a. The first notice describes the failure, actions to remediate and consequences if not remediated; the employer has 90 days to respond and take action.
b. If the employer does not respond timely to the first notice, the plan administrator sends a second notice containing the same information as the first notice plus a warning that the Department of Labor (“DOL”) and all potentially affected employees will be notified of the employer’s unresponsiveness and related consequences.
c. If the employer still does not respond and take action as necessary, the plan administrator sends a third and final notice, containing the same information as the first two notices, to the unresponsive employer, the employer’s participating employees, and the DOL.
3. If the unresponsive employer does not take any remedial action within 90 days of the date of the third notice, the plan administrator implements a spin-off of that employer.
4. The plan administrator complies with any requests for information from the IRS or representative in connection with an IRS examination of the spun-off plan.
contact a member of the Employee Benefit Services Group.
The proposed rule is currently open for public comment. Many indicated that the proposed rules make MEPs more appealing. Below are some of the other comments currently posted (note, this is not an exhaustive list of all comments):
- The procedures for complying with the notice requirements of the exemption should be simplified, and the notice periods should be modified (e.g., shortened, eliminating the first notice, allow for plan-specific procedures).
- Spin-off and termination requirements place an undue burden and fiduciary liability on plan administrators.
- Expand the scope of the proposed relief to 403(b) plans.
- Provide guidance when a participant’s account may not be specifically identifiable due to employment under more than one participating employer during the year.
In March 2019, the US Government Accountability Office provided information regarding households approaching retirement. According to the letter, using 2016 Survey of Consumer Finances data, nearly 50% of households have no retirement savings; of those, half were expected to receive a pension, but the rest were not. Can this change to the one bad apple rule sufficiently reduce the risk of MEPs and thereby incentivize more employers to create and/or participate in them? If so, then hopefully these statistics will improve in the future.
Employee Benefit Services