The IRS recently released proposed regulations (REG 121508-18) addressing the conditions that must be met by certain multiple employers plans (MEPs) for an exception to the “one-bad-apple” rule to apply.
A retirement plan maintained by more than one unrelated employer generally is referred to as an “MEP,” and the qualified status of the plan generally depends on whether all of the participating employers in the plan satisfy certain qualification requirements as a single plan — commonly referred to as the “unified plan rule.” The failure by one participating employer to satisfy an applicable qualification requirement generally will result in the disqualification for all employers participating in the plan, which is commonly referred to as the “one-bad-apple” rule.
To encourage more employers — and particularly small employers — to offer their employees a retirement plan through MEPs, Congress enacted the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, which made a number of changes to eliminate barriers to the use of MEPs. By banding together in a single plan, Congress felt that the participating employers in a MEP could obtain more favorable investment results and more efficient and less expensive management services.
One notable change under the SECURE Act was new Section 413(e), which created a statutory exception to the “one-bad-apple” rule for certain types of MEPs (generally, defined contribution MEPs either maintained by employers that have a “common interest” or have a “pooled plan provider.”) “Pooled plan providers” are generally defined as organizations that have registered as such providers with the IRS and DOL, and have agreed to be responsible for certain administrative duties to ensure the plan meets the applicable ERISA and Code requirements.
Certain conditions must be satisfied for the exception to the “one-bad-apple” rule to apply, including requiring the pooled plan provider, in certain cases, to spin off the assets attributable to an unresponsive participating employer to a separate plan. The regulations address those conditions and are proposed to apply when they are published as final. Until then, participating employers and pooled plan providers can rely on a good faith, reasonable interpretation of the “one-bad-apple” exception — and compliance with the proposed regulations would be considered to meet that standard.
Although the proposed regulations address pooled plan providers, they do not provide guidance on whether a MEP is maintained by employers that have a common interest other than having adopted the plan (one of the alternative types of defined contribution MEPs eligible for the exception).
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