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IRS Issues Proposed Regulation to Give SECURE Act MEPS “Bad Apple” Relief

by | Apr 8, 2022 |

On March 28, 2022, the IRS issued a notice of proposed rulemaking to add a new section –  26 CFR section 1.413-3 Special Rules for Section 413(e) Plans – to the Code of Federal Regulations (CFR). 87 Federal Register 17225 (March 28, 2022).    The proposal provides guidance on the “unified plan rule,” previously known informally as the “bad apple rule,” for plans maintained by more than one employer (multiple employer plans, or “MEPs”), which are treated as single plans under section 413(c) of the Internal Revenue Code of 1986 (the “Code”).   Under section 413(c), all participating employers are treated as one employer, so that the failure of one employer to satisfy the Code qualification rules would result in the disqualification of all of the employers maintaining the plan.

It was this draconian rule, in addition to uncertainty as to which retirement MEPs were single plans under both Title l of the Employee Retirement Income Security Act (“ERISA’) and Code section 413(c), that led to the enactment, in the SECURE Act of 2019, of new Code section 413(e). This new provision creates a new type of defined contribution MEP called a pooled employer plan (PEP) that allows unrelated employers to join together to participate in one plan if the plan has a “pooled plan provider.” Section 413(e) also creates an exception to the “unified plan rule” for PEPs, and for MEPS whose participating employers have a common interest other than adopting the MEP (“common interest” MEPs) (together “413(e) Plans”). The exception as described in section 413(e) allows a covered MEP to avoid plan disqualification, if certain procedures are followed, when one or more participating employers fail to take actions necessary to satisfy the applicable requirements under the Code. The IRS’s proposed regulations interpret new Code section 413(e).

Comments on the proposal are due by May 27, 2022, and there will be a hearing on June 22, 2022. The IRS has requested that speakers provide an outline of their comments by June 17, 2022.  It has also issued a notice of withdrawal of the prior IRS proposed regulation on the “unified plan rule,” which was superseded by the SECURE Act.

The proposed regulation allows the unified plan exception to be used by a “common interest” MEP, but does not define a “common interest.” The regulation does provide additional clarifying guidance for PEPs, pooled employer plans, based on the statutory definition and requirements: a PEP must have a pooled plan provider as the plan’s named fiduciary and plan administrator, and the pooled plan provider must operate under rules created by the SECURE Act and implemented by the IRS and the Department of Labor.  PEPs have been operational since January 1, 2021, and have been provided some rules by the Department of Labor, principally a registration process required by the Act, and special annual reporting rules for the Form 5500 series.  The Department of Labor has also issued guidance on the application of the bonding provision in its final rule on registration requirements for pooled plan providers. 85 Federal Register 72934, 72936 n.5 (November 16, 2020).

The proposed regulation does not address how the IRS will apply the unified plan rule to professional employer organization (PEO) plans, or other MEPs organized under 413(c) of the Code, or how these plans are permitted to treat unresponsive participating employers.  Participating employers in these types of plans need to consult their plan documents.

The proposed regulation

Under the proposed exception to the unified plan rule, a 413(e) MEP can avoid disqualification by ensuring that the MEP’s plan document contains the terms of the proposed  procedures, and by following those procedures. The proposed regulation sets out a procedure for a MEP plan administrator to follow when the administrator reasonably believes there has been a participating employer failure to:

  • provide information in a timely manner after a reasonable request by the MEP administrator for data, documents, or any other information that the plan administrator reasonably believes is necessary to determine whether a MEP is in compliance with a requirement of the Code as it relates to the participating employer, or
  • take action required by a reasonable request of the plan administrator that is necessary for that compliance.

Under the proposal, the plan administrator issues two initial notices to the unresponsive participating employer for either type of failure, culminating in a third and final notice. The notices are sent at 60-day intervals, with the recipient plan administrator’s response required within 30 days. The MEP plan administrator is given the option of combining the notices if the failure to provide information becomes a failure to take action or if the plan administrator receives the requested information and determines that the employer needs to take certain remedial actions.

The notices must describe the participating employer failure, the actions the employer must take to remedy it, and the employer’s option to initiate a spinoff of amounts attributable to its employees into a separate single plan.  The notices must also explain the consequences of the employer failure, including that no further contributions on behalf of participants employed by the participating employer will be accepted and that the individuals who are responsible for the failure may have adverse tax consequences.  The second notice will also notify the employer that if the appropriate action is not taken in 60 days, a final notice will be sent to the employer, participants who are employees, and the DOL.

If after 30 days from the final notice, the unresponsive employer fails to take appropriate action or initiate a spinoff, the plan administrator is required to stop accepting any contributions from the employer and its employees, and provide notice to participants who are employees of the unresponsive participating employer that contributions have ceased, and that they are fully vested and have a nonforfeitable right to amounts credited to their accounts attributable to employment with the unresponsive participating employer. The notice must also inform the participant (or, if applicable, any beneficiary of the participant) that they will receive additional information regarding the disposition of their account.

The general rule after the final notice is that employees will be provided with an election to have their accounts remain in the MEP or transferred to an eligible retirement plan, with the default option being remaining in the MEP. Those individuals electing to remain in the MEP will be entitled to a distribution based on the plan provisions.  The option to remain in the MEP would not be available to plan participants with small account balances who would have received a mandatory distribution had they experienced a separation from service.  The proposal sets forth proposed treatments for cash or rollover options for mandatory distributions of small account balances, and requests comments.

Of Note for Participating Employers

The preamble to the proposed regulation cautions participating employers that the 413(e) plan is required to pursue and implement the spinoff option, or its alternatives, with an unresponsive employer. It also reminds the unresponsive employer that it, and not the plan or any other employer in the plan, will be liable for any liabilities with respect to the plan attributable to employees of that employer and their beneficiaries.

The proposed regulation itself also reminds participating employers that if they choose to spin off their portion of the MEP, any employer failure that would have caused the MEP to fail the qualification rules will result in the spun-off plan failing to meet those requirements.  The proposal also states that the IRS reserves the right to pursue appropriate remedies under the Code against any party (such as the owner of the participating employer) who is responsible, even in the party’s capacity as a participant or beneficiary, such as by not treating a plan distribution made with respect to the owner as an eligible rollover distribution.

The proposed regulation has other provisions that will be of interest to all employers participating in, or considering participating in, a 413(e) MEP.  For instance, when a participant’s current  employer is unresponsive, and the participant has had service with other participating employers, unless there has been separate accounting, the participant’s entire account balance is treated as attributable to employment with the current  unresponsive employer. But, if the participant’s current employment is with a participating employer that is not the unresponsive participating employer, then the account balance becomes the responsibility of the current participating employer. For purposes of this section, a participant’s most recent employment with a participating employer will be treated as the participant’s current employment.  Although the IRS did not explain how this provision works with the proposed notice and spinoff procedures, participating employers will likely request additional guidance, and participants also may have comments on the effect on their account balances.

Special Instructions for the Pooled Plan Provider  

The proposed regulation describes the administrative duties required of a pooled plan provider under the SECURE Act, and advises that in the plan year of a participating employer failure, the unified plan exception will not apply unless the pooled plan provider performs substantially all of the administrative duties that are required for that year.

In general, a pooled plan provider is required to perform all administrative duties that are reasonably necessary to ensure that the MEP meets any applicable requirement under ERISA or the Code and to ensure that each participating employer takes actions, including providing any disclosures or other information, that are necessary for the MEP to meet these requirements.  The administrative duties include: monitoring compliance with the terms of the MEP, the Code and ERISA, maintaining accurate plan data, including up-to-date participant and beneficiary information; conducting all Code qualification testing; processing all employee transactions (such as investment changes, loans, and distributions); and satisfying Code and ERISA reporting and notice requirements.

The proposal also relaxes a prior IRS proposed rule that the exception to the unified plan rule would not be available to MEPs under examination, and the preamble provides guidance on how certain 413(e) MEPs may correct errors under EPCRS. The IRS also announced that it would provide model notices for 413(e) MEPs, and model language for PEPs, in conjunction with publishing the final rule.

IRS Requests Comments

            The IRS requests comments on all aspects of the proposed regulation, and specifically on:

      1. The need for additional guidance on the proposed mandatory distribution rules, including the treatment of missing participants;
      2. Whether there are any circumstances in which it would be appropriate for any of the amounts attributable to the employees of an unresponsive participating employer to remain in the MEP after the employer has specifically directed that there be a spinoff, and, if so, what those circumstances are, and for which employees this treatment may be appropriate;
      3. On the impact of this regulation on small business entities; and
      4. What, if any, guidance would be helpful regarding whether employers have a common interest, including how any guidance should be coordinated with guidance issued by the Department of Labor.


The IRS closely tracked the text of the SECURE Act by only giving relief from the unified plan rule to what the IRS now describes as 413(e) plans, PEPs, and common interest MEPs.   Although the IRS does not propose a definition of “common interest,” these MEPS have a body of guidance from the DOL to rely upon for their single plan status.  The regulation, however, leaves other 413(c) plans in doubt. This only adds to the uncertainty that existed before the SECURE Act as to which plans maintained by more than one employer are considered to be “single” multiple employer plans under both Title I of ERISA and Code section 413(c).

Should you have any questions regarding the IRS proposed regulation, or multiple employer plans, whether covered by the proposal or not, please contact Susan Rees at 571-217-1027 or Barry Salkin at 212-659-4066.