The IRS has proposed a rule that would make 401(k) multiemployer plans (MEPs) more attractive, especially for small employers, by addressing the risk posed to a MEP by one employer member’s bad actions.
A long-standing issue with MEPs has been the penalties all employers in the plan could face under the “unified plan rule” if one employer violates fiduciary rules—for example, by failing to funnel employee contributions to the plan on schedule. The so-called “one bad apple” liability risk that a negligent member can pose to an entire plan has been a major stumbling block for MEPs and was not addressed by a DOL proposed rule on MEPs that was issued last October. That rule, which would let unrelated businesses in different industries join in an “open” MEP offered through association retirement plans, has not been finalized.
The new proposal, which the IRS published July 3 in the Federal Register, would apply to “closed” MEPs, which must share common relationships such as being in the same industry, and would apply to open MEPs when the earlier DOL rule is finalized.
Currently, “MEPs are hard to do,” wrote Robert Toth, principal at Toth Law and Toth Consulting in Fort Wayne, Ind. “It is also quite a task to remove an uncooperative MEP member,” he noted.
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A Unified Plan Rule Exception
Under the unified plan rule, a MEP is qualified based on all employers in the plan. Consequently, the failure by one employer to satisfy a qualification requirement would disqualify the plan for all participating employers.
The new proposal would provide an exception to that if certain other requirements are met. For instance, the MEP’s other employers could spin off the assets and account balances of the noncompliant member into a separate plan.
The DOL proposal offers a solution that would be “clear, effective, and easy to follow, and would remove one of the most significant barriers to establishing a MEP,” said Rob Neis, a partner with law firm Eversheds Sutherland in Washington, D.C., and former benefits tax counsel at the Treasury Department. “The Treasury Department and IRS should be commended on taking this important step toward making MEPs more widely available to the employers that need them, particularly smaller employers,” Neis said.
Rule Mirrors SECURE Act Provision
The SECURE Act, passed by the U.S. House of Representatives on May 23 and still awaiting a vote in the Senate, addressed the same liability issue by providing a safe harbor for employers in an MEP.
“The proposed regulations closely follow provisions of the SECURE Act,” Neis said. The SECURE Act provides that if an employer participating in a MEP fails to comply with the qualification requirements, “the unified plan rule is not violated if the plan assets attributable to that employer are transferred to a single employer plan maintained solely for the employees of that employer, and that employer is solely responsible for any liabilities associated with the plan qualification failures. The proposed regulations would do the same thing.”
The proposed regulations provide more details than the SECURE Act on spinning off the assets of “bad actors,” Neis added, including details regarding notices, timing and similar matters. “It’s fair to say that the proposed regulations would cure most of the problems caused by the unified plan rule and that the SECURE Act provisions addressing the unified plan rule would no longer be necessary,” he said.
Gray Areas Remain
The proposed regulations still leave unresolved issues regarding “the forced spin-off of a recalcitrant participating employer,” Toth pointed out. “The IRS proposal only really addresses a small part of what actually happens under these circumstances—all of which will eventually need to be addressed,” he noted.
This may take a significant regulatory effort, he added, especially if the SECURE Act becomes law.
“The legislation would give Treasury and IRS the authority to issue these types of regulations,” Neis said.