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ARA Presses IRS to Clarify Guidance on MEP One-Bad-Apple Rule


The American Retirement Association is urging the IRS to make several modifications to the proposed regulations addressing the exception to the unified pln rule for multiple employer plans (MEPs). 

Enacted in December 2019, the SECURE Act added Section 413(e) to the Internal Revenue Code, providing relief from disqualification of the entire plan merely because one or more participating employers fail to take actions required with respect to the plan—that is, relief from the “one bad apple” rule. 

The proposed regulations released March 25 spell out the requirements that must be met in order for the MEP to qualify for the exception to the application of the unified plan rule in the event of a failure by a participating employer. Among the conditions are that the Section 413(e) plan administrator must notify the participating employer of its failure and, in certain circumstances, transfer amounts attributable to the employees of the unresponsive participating employer to a separate plan maintained by the employer or provide an election to certain participants to remain in the plan or to have their accounts transferred to another eligible retirement plan.  

In its May 27 comment letter, the ARA calls on the IRS to make changes to the proposal’s notice and administrative requirements; to provide a specified remedial amendment period; to make revisions related to the spinoff of a participant employer’s plan; and to clarify which participants are affected for purposes of full vesting, among other recommendations. 

Notice Requirements

With respect to the notice requirements, the ARA urges the IRS to simplify and condense the requirements by shortening the response timeframe and providing a special rule for futile situations. The ARA believes the structure of the proposed rule, involving three notices and up to six months to provide the notices (nine months after considering the last response deadline), while shorter than the timeframe previously proposed, is still too lengthy and burdensome. 

“The nine-month timeframe places individual participants who are employees of the unresponsive employers at risk of undesirable delays, potentially limited access to their funds, and unnecessary expenses,” the ARA states. Instead, the ARA recommends that the IRS shorten the second and third notice response period from 60 to 30 days, with the ability of the employer to request a 30-day extension.

The ARA also recommends that in the case of a clearly futile situation—such as where the owner of the unresponsive participating employer is incarcerated and all business operations have ceased—the IRS should provide a special rule allowing a Section 413(e) plan administrator to reduce the number of required notices—either qualifying for a combined first and second notice or proceeding directly to the third notice. “Providing a streamlined notice in this situation will protect participants without hampering the rights of the employer,” the letter states. 

In addition, the ARA recommends that detailed procedures for notifications not be required in the MEP document, noting that detailed procedures would be burdensome to maintain in the plan document itself as these may be tweaked over time.

Remedial Amendment Period

The ARA further urges the IRS to specify a remedial amendment to allow the immediate use of the exception. The proposed rule requires the terms of a MEP to set forth the procedures that will be followed to address a participating employer’s failure, including specific plan provisions. 

Although the proposed rule indicates that a Section 413(e) plan administrators may utilize the exception before the proposed rule is finalized by complying with its requirements, it does not address whether a plan administrator must first amend their MEP to provide for the exception. Given that guidance for the model language has not yet been published, the ARA recommends the IRS provide a specific remedial amendment period of no less than two years from publication of the final regulation to allow plan administrators to use the exception immediately and amend their MEPs at a later date. 

The ARA also recommends that the IRS confirm the exception is available to MEPs that were previously amended to comply with the SECURE Act via good faith amendments executed prior to the publication of the proposed rules. 

Administrative Duties

Here, the ARA suggests that, instead of requiring a 413(e) plan administrator to perform all of the administrative duties, the proposed rule be revised to require an administrator to perform substantially all of the administrative duties. This distinction is significant, the ARA notes, as many administrators subcontract small portions of the required functions, such as executing trades, and this change would conform with the statutory language. 

Spinoff Revisions

Noting that a spinoff requires significant coordination between the parties involved and could be difficult to complete within 180 days—as the proposed rule calls for—even when all parties are cooperating, the ARA recommends that the IRS extend the safe harbor period to 12 months.

In addition, the level of coordination required by a participating employer that has not been responsive may lead to additional failures if the employer does not timely execute on its responsibilities and the proposed rule is not clear how the plan administrator should proceed in that event, the letter explains. As such, the ARA recommends the IRS clarify that a failure of an employer to perform spinoff-related tasks requested by the plan administrator is treated as a second failure to act, qualifying for the combined first and second notices. 

The ARA further recommends that the final regulations not impose a requirement on Section 413(e) plan administrators to determine whether circumstances exist to retain accounts of an unresponsive participating employer’s participants where the sponsor has elected a spinoff.

Other Recommendations

Additional recommendations contained in ARA’s letter include: 

  • clarifying which participants are affected participants for purposes of full vesting;
  • confirming that the exception applies to defined contribution MEPs maintained by an employer group or association or by a PEO; and
  • revising the proposed rule regarding retained participant accounts, including that participants who perform service for an employer that is no longer participating in the plan have had a severance of employment from the employer maintaining the plan.