One of the biggest strikes against multiple employer plans (MEPs) may go the way of bellbottoms and Betamax.
The Internal Revenue Service is proposing an exception to the one bad apple rule, which means that the action of lack of action by one adopting employer could threaten the entire qualification of the MEP. The IRS’ proposed regulations, which were developed in consultation with the Department of Labor, that would provide an exception to the unified plan rule (the one bad apple rule) for certain defined contribution MEPs. Under the proposed regulations, a defined contribution MEP would be eligible for the exception to the unified plan rule on account of certain qualification failures due to actions or inaction by a participating employer, if the conditions set forth in the proposed regulations are satisfied. The exception would be available if the participating employer in a MEP is responsible for a qualification failure that the adopting employer is unable or unwilling to correct. It would also be available if the participating employer fails to comply with the plan sponsor’s request for information about a qualification failure that the plan sponsor reasonably believes might exist. For the exception to the unified plan rule to apply, certain actions are required to be taken, including a possible spinoff of the plan assets and account balances attributable to participants who are employees of such an employer to a separate plan.
I always felt the one bad apple rule was used by MEP critics as a slap against MEPs, but what is the practicality of the one bad apple rule where any plan, MEP or not MEP can seek correction through voluntary compliance and the IRS doesn’t disqualify many plans either?