Guidance Needed on Pooled Employer Plans, Firm Says

August 11, 2020

Internal Revenue Service
CC:PA:LPD:PR
Room 5203
P.O. Box 7604, Ben Franklin Station
Washington, D.C. 20044

Re: SECURE Act — Recommended Guidance on PEPs

Dear Sir or Madam:

This letter provides comments on the Further Consolidated Appropriations Act of 2020 (the “Act”), and most specifically Section 101 of the SECURE Act therein regarding pooled employer plans (PEPs). While we appreciate the Department of Labor's Request For Information, it is equally imperative that the Internal Revenue Service (“IRS”) and Department of Treasury (“Treasury”) provide immediate guidance on the scope and operation of these new provisions (including a sample amendment that can be used with pre-approved and individually designed plans without loss of reliance of opinion or determination letter).

Our firm represents a large number of third party service organizations that provide recordkeeping, plan document and reporting services for qualified plans and are interested in offering or recordkeeping PEPs. As these programs are effective as of January 1, 2021, we have an immediate need to understand the Internal Revenue Code (“Code”) restrictions on these plans as systems design and programming are already underway to facilitate the January rollout. Therefore, while we greatly appreciate the good faith compliance standard that applies (under Code section 413(e)(4)(B)) prior to issuance of guidance, as more fully described below, we respectfully request formal (and where more feasible, informal) guidance on PEPs as soon as possible.

We understand that the IRS and Treasury have limited resources, that there are still a large number of outstanding projects on the guidance plan, and that issues surrounding COVID-19 are likely to continue to dominate the guidance agenda in the near term. Nevertheless, we respectfully recommend that the IRS and Treasury make it a priority to address these initial concerns to help facilitate compliance with the SECURE Act — and encourage the adoption of these plans as Congress intended.

Recommended Areas for Immediate Guidance

1. Plan Document Language

There is no longer an ability to obtain a determination letter under the old 5-year system for a multiple employer plan. And only new plans that have not previously received a determination letter are permitted to obtain a Form 5300 determination letter (and it is unclear if that would extend to a PEP provider document).

While pre-approved plans can be established for multiple employer plans, opinion letters to be issued by the end of June 2020 are unlikely to include any PEP language, and in any event these opinion letters do not technically provide reliance on the SECURE Act. There has been no indication whether employers with these pre-approved plans will be able to file a Form 5307 determination letter request or adopt an interim amendment to include the PEP provisions and maintain reliance on the opinion letter or determination letter.

Recommendations:

We suggest the following guidance be issued:

• Provide sample plan amendment language as soon as possible.

• Include in the sample plan amendment the key obligations of the adopting employer when participating in the PEP, including to timely (1) pay reasonable fees, (2) provide census data, including data for plan qualification compliance, and (3) correct plan qualification failures in accordance with Rev. Proc. 2019-19 (or its successor).

• Provide that the sample plan amendment language can be added to a pre-approved defined contribution plan without loss of reliance on the opinion letter or determination letter.

• Permit an adopting employer to file a Form 5307 for a determination letter for the pre-approved plan document that includes the PEP language as an interim amendment.

• Allow a PEP provider to submit the new PEP document for a Form 5300 determination letter on behalf of its clients (even if such client has already received a determination letter on a prior plan document), and permit periodic filings thereafter.

• Grant a period of time after issuance of the sample amendment to adopt the amendment on a retroactive basis (e.g., follow the two-year period for amendments to individually designed plans under the required amendment list).

2. “One Bad Apple” Rule

Longstanding Treasury Regulations provide that “the failure by one employer maintaining the plan (or by the plan itself) to satisfy an applicable qualification requirement will result in the disqualification of the [section 413(c)] plan for all employers maintaining the plan. Treas. Reg. sec. 1.413-2(a)(3)(iv). This so-called “one-bad-apple” rule has been a significant concern for employers joining a multiple employer plan.

The IRS took the first step to provide welcome relief in this area with the issuance of proposed regulations last year (84 Fed. Reg. 31777 (July 3, 2019)). Importantly, the SECURE Act granted additional relief from this one-bad-apple rule, permitting the PEP provider to transfer the employer's assets to an IRA (or other plan described in section 402(c)(8)(B) of the Code) in the event the employer's plan had a qualification failure (including a failure to follow plan terms) that was not corrected through Rev. Proc. 2019-19 (or its successor).

Recommendations:

We suggest the following guidance be issued:

• Revision of the recent “one-bad-apple” proposed regulations to permit the PEP or pooled plan provider to transfer the assets of a plan that has a qualification failure directly to an IRA or group of IRAs on behalf of individual participants.

• Confirmation that participant accounts in affected plans (including plans where the employer does not provide data necessary for plan qualification compliance and testing, or where the employer fails to follow the terms of the Plan document) can be transferred directly to an IRA (including Roth IRA for Roth 401 (k) accounts or a deemed IRA) and reported on Form 1099-R as a non-taxable rollover contribution (and corresponding Form 5498 as a rollover contribution) without violating any otherwise applicable IRS qualification requirement.

• Confirmation that this IRA transfer will not trigger the 6% annual excise tax under Code section 4973 for the participants, even if no corrective actions were taken under the Plan. We understand the employer remains responsible for taking corrective action in accordance with Rev. Proc. 2019-19 (or its successor), and the IRS can initiate an IRS audit of the individual employer (though not the PEP).

• Confirmation that the employer, and not the PEP or the pooled plan provider, is the entity responsible for taking corrective action (including paying for the cost of such correction and any related sanctions/fees) under Rev. Proc. 2019-19 (or its successor).

3. Treatment of the PEP as a Single Plan for Certain Code Purposes

A PEP is defined under the Code (sec. 413(e)) as a defined contribution plan to which section 413(c) applies, which is maintained by employers which do not have common interest other than having adopted the plan. Code section 413(c) (and the IRS interpretation thereof) includes a number of plan qualification rules that are applied by treating all employers under the multiple employer plan as a single employer (e.g., a single plan). These rules include: (1) distribution on severance from employment, (2) participation, (3) vesting, (4) 415 limits, (5) catch-up contributions under Code section 414(v), and (6) elective deferral contributions under Code section 402(g). Notably, only the participation and vesting rules are specifically described in Code section 413(c).

We are concerned that costly and complex plan qualification issues involving these provisions will be unnecessarily raised where an employee participates in more than one unrelated participating employer's plan under a PEP.

We believe Treasury and the Service have ample authority to limit the application of the Section 413(c) rules to PEPs. Section 413(e)(3)(D) provides that each employer shall be treated as “plan sponsor” as to the portion of the plan attributable to its employees. Accordingly, there is no need to treat all of the unrelated employers in the PEP as if they were a single employer for the purposes noted above.

Recommendations:

We suggest the following guidance be issued confirming that:

• A participant has a severance from employment when the participant terminates employment with the employer (and other controlled group members), regardless if the employee is then hired by an unrelated employer that has no common interest other than having adopted the same PEP.

• For Code section 410(a) purposes (other than perhaps elective deferrals), there is no aggregation of eligibility service from unrelated employers that have no common interest other than having adopted the same PEP.

• For Code section 411 purposes, there is no aggregation of vesting service from unrelated employers that have no common interest other than having adopted the same PEP.

• For Code section 415 purposes, there is no aggregation of contributions from unrelated employers that have no common interest other than having adopted the same PEP.

• For Code section 402(g) and 414(v) purposes, there is no aggregation of contributions from unrelated employers that have no common interest other than having adopted the same PEP. That is, an employer-by-employer basis is applied (taking into consideration controlled group rules) for these purposes. As a result, the rules under Code section 402(g)(2) apply where a participant who participates in more than one unrelated plan within the same tax year must notify the plan sponsor of the excess contribution for a corrective distribution. The employer/plan sponsor in turn would notify the PEP service provider of the excess. As these limits are imposed at the participant level, there is no need to create further plan qualification issues by treating the PEP as a single plan.

Applying the above rules on an “employer-by-employer” basis (rather than a “single plan”) is consistent with the legislative history that is silent as to any requirement to treat unrelated employers as if they are related merely because they participate in the same PEP, and supported by the plan sponsor concept under section 413(e)(3)(D).

Any other interpretation would result in one employer's plan benefits and costs being increased by service with unrelated employers — an unacceptable proposition. Moreover, any other result would make these plans unattractive to employers — as they may result in a plan qualification violation through no fault of their own, would create undue recordkeeping challenges on tracking employees, as well as additional costs, and would give non-PEP plans a distinct advantage in the market place.

4. Start-Up Tax Credit

The SECURE Act added and expanded the existing tax credits available for certain plan sponsors that start up a qualified plan. Specifically, the existing credit under Code section 45E was expanded to provide for a credit for small employers equal to 50% of the qualified startup costs paid or incurred during the taxable year (up to $5,000) for the first three years that the employer establishes an eligible employer plan. In addition, Code section 45T provides small employers an additional credit of $500 for the first three years that the employer includes an eligible automatic contribution arrangement (EACA) in a qualified employer plan sponsored by the employer.

Recommendations:

We suggest the following guidance be issued:

• Confirmation that a participating employer in a PEP is eligible for such credits as if the employer adopted its own single employer plan, regardless of when the employer entered the PEP or how long the PEP has been available (or otherwise offering the EACA feature).

* * *

We thank you in advance for your consideration, and please let us know if you need any additional details on these very important provisions.

Respectfully submitted,

Louis T. Mazawey

Elizabeth Thomas Dold

Groom Law Group
Washington, DC