Simplify Proposed Multiple Employer Plan Regs, Firm Says

October 1, 2019

Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224

Re: IRS REG-121508-18: NPRM Regarding Proposed Exception to the Application of the Unified Plan Rule for a Defined Contribution Multiple Employer Plan

Ladies and Gentlemen:

This letter provides comments on the Treasury Department and Internal Revenue Service's (“IRS” or “the Service”) Notice of Proposed Rulemaking to provide an exception to the application of the “unified plan rule” (the “unified plan rule” or “the one bad apple rule”) for defined contribution multiple employer plans (“Proposed Rules”). 84 Fed. Reg. 31777 (July 3, 2019). We appreciate Treasury's and the Service's efforts to address this longstanding problem area and the very thoughtful proposal.

We have long represented several major multiple employer plans, both defined contribution and defined benefit plans, serving tens of thousands of participants. We believe the guidance can be simplified considerably while still achieving its important goals. We appreciate your considering the following comments, which reflect our experience representing these unique programs.

1. The Service should make the proposed multiple notice requirements a safe harbor, and allow plans to adopt their own notice and related procedures intended to achieve comparable results under a facts and circumstances approach.

The Proposed Rules contain detailed requirements for notifying unresponsive or noncompliant employers over an extended period of time. In general, they require the plan administrator to provide up to three notices to noncompliant employers, describing their failures and remedial actions they should take, at specified times over an extended period. The third notice would also be sent to participants and their beneficiaries, as well as to the Department of Labor, and would need to include “an explanation of any adverse consequences to participants in the event that a spinoff-termination occurs.”

We are concerned that these provisions are too rigid and would result in unnecessary increased costs — for example, the costs of sending up to three notices to all participants could be significant as plan administrators may be unable or unwilling to rely on electronic distribution methods. We are also concerned that the proposed time frames would result in a protracted compliance process to the potential detriment of all concerned, including plan participants. Well-run multiple employer plans already have procedures along these lines — which include flexibility for discussions with the affected employers to develop the facts and identify possible corrections, the possibility of approaching IRS for guidance under EPCRS, etc.

We note also the Proposed Rules seem to assume there is a “known qualification failure,” but that is not always clear. Plan administrators and participating employers may reasonably differ over whether a particular practice or fact pattern involves a violation of the qualification rules. In some cases, the plan administrator and the employer may file for a determination under EPCRS as to whether a violation has occurred or, for example, relates to a “scrivener's error.” While these discussions/proceedings are pending, there should be no obligation to follow the detailed notice/timing procedures — and the plan's qualification should not be at risk.

To accommodate these and other situations that arise, we recommend that, as an alternative, the final rules allow plans to maintain reasonable procedures to address potential qualification defects, and to correct defects that arise in a reasonable time, based on the facts and circumstances. Alternatively, and at a minimum, the Service should shorten the time periods and not require any notice to the Department of Labor (“DOL”). In this regard, participants are free to notify DOL of irregularities at any time.

2. The regulations should allow plans to describe the notice, etc., procedures in a policy manual or other written guidelines approved by the plan administrator and furnished to participating employers instead of requiring plan amendments.

In our view, plans should not be required to expand their already lengthy documents to describe the procedures in this area, including multiple notices and procedures for obtaining information from participating employers. Based on the Proposed Rules, this could add many pages of a procedural or operational nature to plan documents.

Most plans have a plan operations or policy manual that could contain these procedures and be provided to participating employers. In addition, the procedures could be added to participation or adoption agreements that employers sign when they join a multiple employer plan or amend their participation agreement. Among other benefits, procedures described in these formats would be more easily amended than if they were included in the plan document itself. We recommend that such formats be permitted as an alternative to plan provisions.

3. The relief should be available to plans under an employee plans examination, provided that the affected employer is not under such an examination.

We respectfully submit that a plan that is “under examination” at the time the first notice is provided — or indeed at any time — should not be excluded from the proposed relief. This position is unduly harsh and conflicts with the goal of promoting compliance.

A multiple employer plan could be “under examination” as a result of a routine Form 5500 audit or because of a completely unrelated issue to the one raised by the participating employer. We suggest these matters should not impede the plan's efforts to pursue corrections (or necessary information) with a participating employer to maintain the plan's qualification. Similarly, it would be counter-productive for plan document or other issues raised in a determination letter proceeding to be a bar to a plan's reliance on this rule, particularly given the limited scope of review in such a proceeding (e.g., demonstrations of compliance with certain qualification requirements may no longer be submitted).

4. The Service should modify the “spinoff termination” requirement so that the plan administrator is not required to set up a successor plan. Instead, if the subject employer does not initiate a spinoff, the plan administrator should be able to deem the employer's participants to constitute a separate portion of the section 413(c) plan to which the special rules under subsections (g)(7) and (8) apply.

In our experience, it is rare for an employer who has had a qualification defect to take the initiative and spin off to a new plan. Instead, the employer usually “walks away” from the plan, which is left to “clean up the mess,” to the extent possible. Typically, no additional participant or employer contributions are accepted and participants are notified, while participant accounts continued to be held by the plan on the same basis as for an active employer's participants.

We recognize that this scenario may not be ideal, but, most importantly, the plan administrator continues to oversee the accounts and plan fiduciaries continue to carry out their responsibilities, e.g., to monitor investment options, administer hardship and other distributions, etc., so participants' accounts continue to be protected. Accordingly, we recommend that the regulations provide that the former employer's participants' accounts may constitute a separate portion of the section 413(c) plan as long as the plan administrator continues to administer the affected accounts in accordance with applicable plan qualification rules. In such cases, the favorable qualification rules (e.g., rollovers) will continue to apply to these accounts.

While the Proposed Rules are intended to provide a framework for an actual spinoff, we respectfully submit that this will substantially increase the administrative and legal costs of dealing with noncompliant employers — with little or no resulting benefit to the participants. In addition, adopting our recommended “deemed separate plan” approach should minimize the need to address thorny fiduciary issues with respect to spin-off plans (noted at 84 Fed. Reg. at 31791), for which guidance may take considerable time to develop.

5. The regulations should provide that where the plan administrator and the participating employer agree in writing, they may seek an expedited EPCRS ruling from the Service on whether the facts and circumstances establish a qualification failure for which the procedures should be followed.

We appreciate that the Proposed Rules would assist plan administrators in obtaining necessary information from recalcitrant employers in order to identify potential qualification violations. We also appreciate that the Service and Treasury solicit comments on “additional procedures to facilitate the resolution of disputes between a section 413 plan administrator and an unresponsive participating employer.” 84 Fed. Reg. at 31791.

We agree there is a need for additional procedures in this area and suggest that they may also include responsive employers who genuinely dispute whether there is a qualification error. Currently, our clients have used EPCRS to address these situations, but that has several shortcomings, including:

• it takes a long time (usually a year or more), and is costly often involving multiple law firms, etc.; and

• it requires that the parties affirmatively state that there is an error, even when one or both parties have grounds to believe that is not the case.

We recommend that the Service expand EPCRS to create a type of “alternative dispute resolution” procedure under which a section 413(c) plan and the affected employer may submit the facts and legal positions to the Service for a more timely resolution, e.g., generally in no more than six months. The parties would agree to be bound by the Service's resolution, which would determine whether there is an operational failure which the affected employer would correct within a reasonable period after the Service rules. Hopefully, this process will persuade some employers to stay in the section 413(c) plan to the benefit of all concerned.

We would appreciate the Service's consideration of this option and would be pleased to discuss it further.

6. The exception to the unified plan rule should apply to defined benefit plans. We believe the alternative discussed in Part 4 will minimize the complexity that might otherwise arise in the defined benefit plan context.

The NPRM also solicits comments on the circumstances, if any, under which the exception to the unified plan rule should be available to defined benefit plans (taking into account issues arising from the minimum funding requirements and the spinoff rules for defined benefit plans, including the treatment in such a spinoff of any plan underfunding or overfunding).

We recognize that spinoffs from defined benefit plans involve additional complex issues. However, we suggest that these issues would be minimized if the Service adopts the “deemed separate plan” approach suggested in Part 4, at least where the section 413(c) plan is a “single plan,” i.e., it is a pre-1989 plan that has not made the election under Code section 413(c)(4)(B) to treat each employer as maintaining a separate plan for purposes of minimum funding requirements under Code section 412. Such a plan is a “single plan” for minimum funding requirements and most other purposes under ERISA and the Code and that should minimize at least some of the associated legal issues. Typically, under a section 413(c) plan, an employer is not required to set up its own plan merely because it decides to freeze its plan (though that employer may be subject to withdrawal liability to help protect the remaining employers in the plan).

We respectfully submit there is no compelling reason why this very helpful solution to the “one-bad-apple” rule should not apply to such defined benefit plans. Indeed, given the added complexity of the qualification rules for defined benefit plans, it would be bad pension policy to continue to subject such plans to the risk of disqualification now that this regulatory solution to the problem has been developed.

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We appreciate your considering these comments. We would be pleased to expand on any point or provide additional information.

Sincerely,

Louis T. Mazawey
Groom Law Group
Washington, DC