The IRS recently withdrew and replaced regulations that it had proposed in 2019 concerning sections 413(c) and 413(e) of the Internal Revenue Code (IRC), which offer an exception to section 413’s “unified-plan rule” (the Rule). The Rule is more commonly known as the “one-bad-apple rule” for multiple employer (MEP) and pooled employer (PEP) plans.
Under the Rule, a failure by one participating employer in a MEP or PEP to satisfy the qualification requirements of the IRC would result in the disqualification of the entire MEP or PEP for all participating employers. Qualification requirements may mandate the provision of information upon request or taking some other action. The new proposed regulations, which the IRS published in the Federal Register on March 28, 2022, allow certain MEPs and PEPs to preserve their tax-qualified status despite the noncompliance of one or more participating “bad-apple” employers.
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) amended ERISA and the IRC to create a new type of defined contribution MEP or PEP that a pooled plan provider (PPP) administers. Since just one noncompliant employer can have dire consequences for all other participating employers in a MEP or PEP, the SECURE Act created section 413(e) to provide an exception to the general rule. The Act also directed the IRS to issue regulations about implementing this exception.
Giving Notice to the Noncompliant Employer
To qualify for this exception, the plan administrator must send notices to the noncompliant participating employer (and, if applicable, the participants of the participating employer and the Department of Labor (DOL)). The plan administrator may need to provide up to three notices to the employer.
The First Notice
The first notice for “failure to provide information” must occur no more than 12 months following the end of the plan year for which the DOL required the information. The first notice of “failure to take action” must occur no more than 24 months following the plan year’s end. The first notice must contain:
- A description of the failure at issue;
- The remedial actions that the employer must take to cure the issue;
- The option to spin off its portion of the MEP or PEP to a separate single-employer plan;
- A statement that failure to correct the issue or spinoff will cause the plan administrator to stop accepting contributions from the employer and its employees; and
- A 60-day deadline to act.
- Stop accepting contributions from the employer and their employees;
- Fully vest the employer’s participants concerning the amounts attributable to their employment with the noncompliant employer;
- Provide notice to the employer’s participants and their beneficiaries that the administrator will make no further contributions, that their account balances are fully vested, and that they will receive further information concerning the disposition of their accounts; and
- Provide the opportunity for participants and beneficiaries to make an election to either directly roll over their respective account balances to an eligible retirement plan or remain in the plan.
