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IRS Issues Proposed Guidance on MEP One-Bad-Apple Rule


Proposed guidance addressing the so-called “one-bad-apple” rule under the SECURE’s Act multiple employer plan (MEP) provisions was released March 25. 

The proposed regulations address changes under the Setting Every Community Up for Retirement Enhancement (SECURE) Act providing an exception to the application of the “unified plan rule” for MEPs in the event of a failure by one or more employers participating in the plan to take actions required of them. The IRS also notes that it is withdrawing proposed regulations amending the application of the unified plan rule to MEPs that were issued in July 2019, prior to the SECURE Act, but were never finalized. 


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. 

A MEP is eligible for the exception to the unified plan rule if it is a Section 413(c) defined contribution plan described in Code Section 401(a) or consists of individual retirement accounts described in Section 408 (including by reason of Section 408(c)), provided that the MEP either is maintained by employers that have a common interest or uses a pooled plan provider (PPP).

The IRS notes that proposed regulations do not provide guidance on whether a Section 413(e) plan is maintained by employers that have a common interest other than having adopted the plan. In this case, the Treasury Department and IRS request comments on what (if any) guidance would be helpful regarding whether employers have such a common interest, including how any guidance should be coordinated with guidance issued by the Department of Labor.

Unified Plan Exception 

For the unified plan exception to apply, the proposed regulations provide that certain conditions must be satisfied, including that the Section 413(e) plan administrator must notify the participating employer of the participating employer 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 addition to defining a Section 413(e) plan, the proposed regulations provide a number of other definitions, including that: 

  • a Section 413(e) plan administrator is the plan administrator, within the meaning of Section 414(g), of a Section 413(e) plan; 
  • a participating employer is one of the employers maintaining a Section 413(e) plan; and 
  • an unresponsive participating employer is a participating employer that has a participating employer failure. 

Consistent with Section 413(e)(3)(A)(i), the proposed regulations require a pooled plan provider to perform all administrative duties that are reasonably necessary to ensure that: 

  • the plan meets any applicable requirement under ERISA or the IRC for a plan described in Section 401(a) or for a plan that consists of individual retirement accounts described in Section 408 (including accounts described in Sections 408(c), 408(k), or 408(p)), whichever is applicable; and
  • each participating employer takes actions, including providing any disclosures or other information, that are necessary for the plan to meet those requirements.

The proposed regulations provide that if a Section 413(e) plan has a PPP during the plan year of a participating employer failure, the unified plan exception will not apply unless the PPP performs substantially all of the administrative duties that are required of the PPP for that year.

Plan Language Requirement

The proposed regulations also specify that the terms of the Section 413(e) plan document must include language describing the procedures that will be followed to address a participating employer failure, including a description of the notices that the Section 413(e) plan administrator will send in the case of a participating employer failure. The plan must also state that the Section 413(e) plan administrator will send the first notice (or, if applicable, the combined first and second notice) by specified deadlines that depend on the type of failure. 

With respect to a failure to take action, the proposed specified deadline is 24 months following the end of the plan year in which the failure to satisfy a requirement of Section 401(a) or Section 408 occurs. In addition, the plan terms must describe the actions that the Section 413(e) plan administrator will take if, by the end of the 60-day period following the date the final notice is provided, the unresponsive participating employer does not take appropriate remedial action or initiate a spinoff.  

Comments are specifically requested on the rules for mandatory distributions for employees of an unresponsive participating employer, as described in the section titled “Required Actions Following Employer’s Failure to Meet Deadline.” 

The IRS also notes that a Section 413(e) plan will not be eligible for the exception to the unified plan rule if it does not satisfy this plan-language requirement. 

Notice Requirements

The proposed regulations require the Section 413(e) plan administrator to provide up to three notices regarding a participating employer failure to the unresponsive participating employer; with the final notice, if applicable, also being provided to participants who are employees of the employer (and their beneficiaries) and the Department of Labor.

The first notice must describe the participating employer failure (or failures), as well as the actions the unresponsive participating employer must take to remedy the failure, and the employer’s option to initiate a spinoff of amounts attributable to the employees of the unresponsive participating employer to a separate single-employer plan that is maintained by the employer. The first notice must also explain the consequences under the terms of the plan if the unresponsive participating employer fails to take action, including that the employer’s participants will not have any further contributions made on their behalf and that the failure may have adverse tax consequences.

If an unresponsive participating employer neither takes appropriate remedial action nor initiates a spinoff by the deadline in the proposed regulations, then the Section 413(e) plan administrator must provide notice to participants who are employees of the unresponsive participating employer explaining the consequences. 

Comments and Observations

The IRS notes that although these proposed regulations might affect a substantial number of small entities, the economic impact of these proposed regulations is not expected to be significant. 

In addition, the IRS observes that, while some employers may be reluctant to join a MEP because of the potential adverse impact of the unified plan rule, the proposed regulations, by implementing the statutory exception to the unified plan rule, should eliminate a potential barrier to an employer joining a MEP. 

Additionally, the IRS believes that it is unlikely that the exception to the unified plan rule will be used often in a Section 413(e) MEP, such that it is expected that participating employers in DC MEPs will comply with applicable requirements. 

Comments on the proposed guidance must be received by 60 days after publication in the Federal Register. A public hearing has also been scheduled for June 22, 2022.