Corrections Made to ‘One-Bad-Apple’ Rule Proposal for MEPs

The IRS has made language changes to its Notice of Proposed Rulemaking (NPRM) relating to the tax qualification of plans maintained by more than one employer.

These plans, maintained pursuant to section 413(c) of the Internal Revenue Code (IRC), are often referred to as multiple employer plans, or MEPs. The proposed regulations would provide an exception, if certain requirements are met, to the application of what the regulations call the “unified plan rule,” and what the industry refers to as the “one-bad-apple rule.” This rule can lead to the disqualification of an entire MEP thanks to one employer’s mistake. It applies for a defined contribution MEP in the event of a failure by an employer participating in the plan to satisfy a qualification requirement or to provide information needed to determine compliance with a qualification requirement.

The exception generally would be available to the plan if one participating employer causes and is unable or unwilling to correct a qualification failure. It would also be available if the participating employer fails to comply with the Section 413(c) plan administrator’s request for information about a qualification failure that the Section 413(c) plan administrator reasonably believes might exist. For the exception to the unified plan rule to apply, certain actions are required to be taken, including, in certain circumstances, a spinoff of the assets and account balances attributable to participants who are employees of such an employer to a separate plan and a termination of that plan.

The IRS says that, as published, the NPRM contains errors which may prove to be misleading and need to be clarified.