Transcript Available of IRS Hearing on Multiemployer Plan Regs

UNITED STATES DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TELECONFERENCE PUBLIC HEARING ON PROPOSED REGULATIONS

"MULTIPLE EMPLOYER PLANS”

[REG-121508-18]

Washington, D.C.

Wednesday, June 22, 2022

PARTICIPANTS:

For IRS:

RACHEL LEVY
Associate Chief Counsel
(Employee Benefits, Exempt Organizations,and Employment Taxes)

LAURA WARSHAWSKY
Acting Deputy Associate Chief Counsel
(Employee Benefits, Exempt Organizations, and Employment Taxes)

PAMELA R. KINARD
Senior Counsel
(Employee Benefits, Exempt Organizations, and Employment Taxes)

JOHN T. RICOTTA
Chief, Qualified Plans Branch 3
Office of the Associate Chief Counsel
(Employee Benefits, Exempt Organizations, and Employment Taxes)

THOMAS C. MORGAN
Attorney
Office of the Associate Chief Counsel
(Employee Benefits, Exempt Organizations, and Employment Taxes)

For U.S. Department of Treasury:

BILL EVANS
Attorney Advisor
Office of Benefits Tax Counsel

HARLAN WELLER
Actuary
Office of Tax Policy

Speakers:

ZACHARY G. KEEP
Paychex Retirement LLC & Paychex, Inc.

RICHARD E. JONES
Aon Consulting Inc.

COURTNEY ZINTER
KENT MASON
Davis & Harman LLP on the behalf of American Benefits Council

* * * * *

PROCEEDINGS

(10:02 a.m.)

MS. LEVY: Thanks much and good morning everybody. We're welcoming you to the public hearing on proposed regulations entitled Multiple Employer Plans. That's Reg. No. 121508-18. First, I'll list the government employees who are on the panel. There's myself, Rachel Levy. I'm Associate Chief Counsel for Employee Benefits, Exempt Organizations, and Employment Taxes at the IRS Office of Chief Counsel. We're also joined by Laura Warshawsky, the Deputy Associate Chief Counsel for Employee Benefits, also at IRS Office of Chief Counsel. Pamela Kinard, Special Counsel for Employee Benefits of Chief Counsel. John Ricotta, Branch Chief of Qualified Plans, Branch 3, at the Office of Chief Counsel. And Thomas Morgan, attorney in the Office of the Associate Chief Counsel of EEE. We're also joined by two members of the Department of the Treasury. Bill Evans, an attorney advisor at the Office of Benefits Tax Counsel and Harlan Weller, senior actuary, Office of Tax Policy.

We will have three scheduled speakers this morning offering their comments. The first is Zachary Keep on behalf of Paychex Retirement, LLC & Paychex, Incorporated, Richard Jones on behalf of Aon Consulting, Incorporated, and Courtney Zinter and Kent Mason on behalf of Davis Harman, LLP on behalf of the American Benefits Council.

All scheduled speakers will have 10 minutes and will receive a one-minute warning and then be reminded when their 10 minutes is up. Time permitting, when we're done with the scheduled speakers, we will open up the telephone lines for comments. Those comments will become a part of the public record. Thanks very much. And with that, I will hand it over to Zachary Keep of Paychex.

MR. KEEP: Thank you so much, Rachel. First and foremost, I would like to thank everyone for the opportunity to speak this morning. Again, my name is Zachary Keep, and I am the primarily responsible compliance manager for the Paychex Pooled Employer Plan, or PEP. I'm speaking this morning on behalf our director of compliance and the Paychex Pooled Employer Plan administrators.

Since its inception, Paychex has been ideally situated to observe the profound impact that the SECURE Act has had upon the broader retirement space. We strongly feel that SECURE, in general, and the concept of pooled employer plans in particular, stands to significantly enhance access to retirement plans in all quarters.

Paychex launched a pooled employer 401(k) plan in January 2021. Our goal was to provide small business owners and their employees with a simpler, more cost-effective 401(k) plan solution. Paychex Retirement LLC serves as the pooled plan provider, or P3. The Paychex pooled employer plan has been extremely well received by our small employer client base and more than 10,000 participating employers are contributing to our pooled employer plan to date.

The pooled employer plan offering is particularly well suited for small to medium-size businesses that might otherwise be unable to offer a retirement plan either due to lack of a cost-effective alternative or an overall inability to dedicate the resources and effort needed to administer a traditional single employer plan.

Unfortunately, as written, the currently proposed rules would have unintended effects that would serve to erode the ability of pooled employer plans to serve the very small employers for whom they were created. In the interest of time, I'm going to primarily discuss only one or two aspects of the proposed regulations this morning: The notice process for so-called bad apple plans, and perhaps much more importantly, the concept of orphan participants.

First, orphan participants. As currently envisioned, participants in a "bad apple plan" will, by default or by request, remain in the pooled employer plan effectively as participants at large. Paychex anticipates a scenario where this category of unaffiliated participants slowly grows to constitute a significant portion of the overall plan. This creates several concerns.

On an individual level, this treatment of orphan participants is very much at odds with the current efforts to assist participants in tracking and consolidating their retirement accounts. In practice, many instances of orphan participants will arise from the failure of a constituent employer within the pooled employer plan. In this scenario, the pooled plan provider and the participant must work together to maintain contact.

We foresee circumstances where a participant fails to update their pooled plan provider when a change in contact information has taken place. This will lead to communication failures. It's going to create an inability for participants to receive critical notices and it's ultimately going to increase the likelihood of a PEP effectively being lost by the participant.

Similarly, the proposed practice of allowing orphan participants to self-certify their eligibility for a distribution will substantially erode the ability of the PEP 401(k) to serve as a retirement savings vehicle. It's going to do that by rendering invested dollars much more easily accessible and thus, as we know, much more prone to distribution. There's currently a great deal of infrastructure in place to protect participants by preventing inappropriate access to plan assets prior to retirement. The proposed treatment of orphan participants as currently envisioned effectively eliminates these protections.

On the macro level, the long-term treatment of orphan participants might influence the ability of a pooled employer plan to serve its intended purpose as an approachable retirement vehicle for small and medium-size businesses. As pooled plan providers service an increasing number of orphan participants within their respective plans, it is inevitable that they will seek to address the cost of servicing these participants.

In our view, it seems certain that this will result in higher fees for constituent employers within a pooled employer plan. This is going to make it less likely that an employer will choose to pursue the creation of a retirement plan under the architecture of the SECURE Act. And I feel that it is very important to note that the inevitably escalating percentage of participants at large is going to amplify this issue over time.

Accordingly, Paychex recommends that the final regulations allow pooled plan providers to invoke mandatory distribution rules for orphan participants without termination status. Thus, distributing smaller account balances directly to participants and processing automatic rollovers to an individual retirement account, or IRA, for participants with larger account balances. This treatment would closely conform with historical industry practice, which has relied upon individual retirement accounts as the vehicle of choice for post-employer assets. This would also allow participants the greatest possible degree of portability and is more likely to be familiar to the very participants that pooled employer plans were designed to serve.

With respect to the notice process, as currently envisioned, PEP constituent employers will receive several notices as they move through the bad apple spinoff process. These notices are currently envisioned to be spaced over a period of months to, in some cases, years. Additionally, current regulations contemplate the involvement of participants, beneficiaries, and the Department of Labor in the notice process.

The PEP, or pooled employer plan, is by nature most appealing to small employers, 50 percent of whom will fail within the first five years of commencing operations. In other words, employers that create qualification failures are often struggling to survive financially and have difficulty retaining their workforce. Long delays of months to years between the identification of a known or potential qualification failure and the distribution of benefits to former employees make it much more likely that employees will have moved on to a new employer without updating their contact information with a former or potentially insolvent employer or their pooled employer plan administrator.

Similarly, the prescribed notice process will, particularly in light of what we see as extensive growth of pooled employer plans nationwide, result in thousands and eventually tens of thousands of notices being required. Accordingly, Paychex joins the broader 401(k) industry in requesting further clarity on how good faith compliance with the envisioned notice process can be achieved.

In closing, we feel that pooled employer plans as envisioned under the SECURE Act are a profoundly beneficial development both for employers and plan participants. We also feel that a robust process to address compliance issues via the "bad apples process" within the plan is a critical aspect of its long-term success. Paychex urges the IRS to contemplate alternatives to the currently proposed regulations that protect plan participants, employers, and ensure the ability of the pooled employer plan to best serve the American public.

Once again, thank you very much for the chance to speak today. This concludes my testimony.

MR. WELLER: This is Harlan Weller. I have a question for you.

MR. KEEP: Absolutely.

MR. WELLER: What I am hearing from your statement is that our notice process, which was designed to get the employer to comply with the rules, a series of sort of more drastic —

MR. KEEP: Yes.

MR. WELLER: — messages. You're saying that it's not worthwhile. That it's inevitable that these employers are not going to comply with the rules. Is that what I'm hearing?

MR. KEEP: Not necessarily inevitable in all cases. And I think you raise an excellent point. The increasing drastic notices will, without a doubt, incentivize many employers to take action. I think in Paychex' view, particularly in light of our close affiliation with smaller employers, many of whom will create these qualification failures as a result of underlying issues, issues with business solvency in many cases, our recommendation would be a simplification of the notice process to effectively give those small employers who are struggling the urgency to act, if that makes sense.

MR. WELLER: So, I'm not quite sure how to translate that. To say we have more drastic notices over time. You're saying instead we should immediately have the strongest notice or — that's what I'm trying to get a sense of.

MR. KEEP: Yes. I think that would certainly be beneficial. You know, the process as currently envisioned can take years. We would recommend an acceleration of that timeframe.

MR. WELLER: So, you're recommending initially a very strongly worded notice and not giving much time to — for the employer to get its act together.

MR. KEEP: Correct, yes.

MR. WELLER: Okay.Thank you.

MS. KINARD: Hi. This is Pamela Kinard. I had a couple of questions. How often do you think that this would happen in a PEP where you're going to have to go through this process and eventually where the unresponsive participating employer is not responding and you feel you're going to have to take either do the election or something where you're suggesting that maybe we would just payout the benefit for these? How often do you think you anticipate this? Because I've heard before that they thought this would be a rare thing, so.

MR. KEEP: Yeah, and that's certainly our hope that it will be a rare thing. Obviously, we want the PEP to be very successful as it has been thus far. That said, the fate of many small businesses is kind of a matter of record. We know that a large portion of businesses become insolvent. We know that the businesses that become insolvent are likely to create compliance failures.

So, although we don't know how often it will happen simply because pooled employer plans are newer, we do anticipate that it will not be extremely rare. It will be something that takes place at least occasionally.

MS. KINARD: And the second question, you mentioned about participants that if they had elected to stay in the plan, we have the goal about the self-certification. You said that there's a concern with the self-certification because it would give the participants possibly easy access to their funds before they were eligible for the time that say that they, you know, they separated from service when they hadn't. The whole, you know, for the goal to give flexibility to the PEP so it wouldn't have to track the unresponsive participating employer to ensure that that participant has, in fact, separated from service with their employer — the employer. And I guess the question is if the solution is to just pay out all the benefits, how does that help to keep those assets preserved for retirement?

MR. KEEP: Well, I think our preferred solution is moving the assets to an individual retirement account. That is really, in our view, the best option here. Not necessarily a direct payout. You know, certainly there's cases of small account balances. Overall, in the vast majority of circumstances, we would refer to see those assets move from a PEP to an IRA.

MS. KINARD: No, I understand that. I was just asking how does that help preserve retirement assets when if it goes into an IRA, I could just take out the money the next day, without worrying about a plan or having to meet some distributable event?

MR. KEEP: Mm-hmm. Well, you know, there is overall, I think, an individual retirement account that the participant owns is going to be used more for retirement. There are, as I understand it, there are checks and balances in place that make it a little bit easier than just taking money out the next day. Paychex does not directly administer IRAs. But, overall, we do feel that the ability to self-certify for direct 401(k) distribution is kind of a sea change from what has historically been permitted in 401(k)s.

MR. EVANS: Pam, I don't know if you were finished. I had a question. This is Bill Evans.

MR. KEEP: Okay.

MR. EVANS: Yeah. My question is so, how are you all thinking about dealing with the costs associated with these you call them orphan participants? I mean, is it your anticipation that there will be charges to the account that — to take into account the cost of doing the stuff you do for those participants that the, you know, maybe the employer was paying the fees while there was an active employer. But now that employer's gone, what do you all anticipate doing or have you started — have you started some approach on kind of what are those costs, you know —

MR. KEEP: Yeah, that's an excellent question. I mean, you know, Paychex certainly at this point, again, given how new pooled employer plans are to date, the spinoff process hasn't really commenced. But more broadly, we do feel that in time there will inevitably be spinoffs, whether a small number or a large number. And pooled employer plans as a whole, not necessarily Paychex in particular, but pooled employer plans as a whole, will eventually seek to address the costs of servicing orphan participants. Whether they're low or high is immaterial. There's still going to be a cost there. And it's our expectation that at least some pooled employer — I'm sorry — some pooled plan providers will seek to, you know, recoup those costs in the form of higher fees for participating employers.

MR. EVANS: And do you feel like you need something from us to say that that is permissible? Or something from Department of Labor that says that's permissible? Or you think that that's pretty clear that that's fine and you would look for it, you know, you had planned to do that or? Anything you're looking for guidance with respect to that?

MR. KEEP: You know, overall, our preference, again, would be, yeah, to address the foundational treatment of orphan participants. Failing that, you know, certainly, we would never object to regulatory clarity in how those costs would be recouped. And I'm sure I speak for the industry as a whole in that respect.

MR. EVANS: Mm-hmm. Thank you. Can I, while I have the — one more question from me. It's from Bill. So, you talked about that, you know, 50 percent of the small employers fail. I forget if you gave a timeframe for that. So, your 10,000 participating employers in your PEP at this point, so, the thought is that 5,000 of those will be, you know, not operating within some period of time. And the thought is that you'll have 5,000 bad apples or is it more, you know, most of those or am I — or do you have kind of a different pool of those 10,000 and you're not anticipating, you know, 5,000 of them going out of business, or . . .?

MR. KEEP: Well, again, yeah, I think I see the point — you know, certainly simpler as may take but yes, you know, we know, you know, statistics are well known that small particularly medium-sized businesses do and to sell at a faster rate and it is our concern that those businesses who do fail are much more likely to create qualification issues. So it might be a little bit of a simplification to say Paychex expects 5,000 of our current 10,000 participants to become insolvent. But we do expect a portion of those to become insolvent because we know the statistics on the small business space. Does that make sense?

MR. EVANS: Yeah. And also I think I'm hearing you say that then, you know, say that — you say that it follows the statistics so 5,000 went out of business. I guess that doesn't mean that 5,000 are going to have a problem with the plan, you know, some are going to wind up —

MR. KEEP: Yeah, not likely.

MR. EVANS: — so it will be a small piece of that, that might have qualifications issues. Okay. Thank you.

MR. KEEP: Are there any other questions?

MS. LEVY: Any other questions? Okay. So thank you so much Zachary Keep. We'll move on now to Richard Jones representing Aon Consulting.

MR. JONES: Great. Thank you. As suggested, I'm Rick Jones. I'm a senior partner of Aon and I'm leading Aon's Pooled Employer Plan. We went live on January 4, 2021, which was the first business day of 2021, and we're continuing to grow the AM PEP with participating employers and their participants and assets ever since. So, thank you so much for the opportunity to testify today on these very important issues for the future of PEPs. I'd like to speak to two things today. Some of it dovetails into what Mr. Keep from the Chase — from Paychex was just talking about but the two things are dealing with an unresponsive employer in a PEP and then secondly the PEP service crediting rules as addressed in the preamble to the proposed rules issued back at the end of March. So, I'll start with the notion of removing an unresponsible employer from a PEP. I will preference this by saying that our current in attendance client base and participating employer base within the AM PEP is quite a bit different, I believe, than the Paychex examples that was just talked about. We are contemplating calling hundreds of employers participating in the AM PEP as opposed to the thousands or tens of thousands that appear to be the strategy and value equation for what Paychex is delivering. With that said, with the notion of removing an unresponsive employer from a PEP, we haven't faced that yet. We are finding that great collaboration is in place with all of the participating employers that are implementing the PEP and have the people participating in the PEP. Given that and the fact that we haven't faced it yet, we really suggest that prescriptive procedures and processes whether they're documented in regulation or planned documents be minimized at this point until we as a collective industry learn from experience and really know the issues associated with these types of things and these types of things that were just part of a conversation you were just having with Mr. Keep. Since we are acting as a fiduciary under Risk of Section 316 and 402(a), as Pooled Plan Provider we're required to do whatever we do in a fiduciary capacity from an administrative standpoint and protect participants interest, and that would be job No. 1 for us, is to maintain balance or exit participants from the PEP as appropriate. I think it's also important that we maintain or transfer participant account balances in an accurate and cost-effective way, and again that's an important job that we have. So, again all of this in our opinion given that frankly we haven't faced it yet, necessitates a learning process for us as an industry and for you as regulators in a generous time frame to work it out.

The second thing I'd like to speak to is the PEP service crediting, which was addressed again in the preamble to the proposed rules issued at the end of March, and as many of you know and was documented in a number of the comments letters that you received relative to these proposed rules, the preamble speaks to the application of the pre-PEP rules that were in our appropriate for MEPs for the service crediting for vesting and eligibility purposes in PEPs. Bottom line, we don't believe that these pre-PEP rules applicable to MEPs should apply and do apply under the terms of the SECURE Act, and we further believe that applying those rules will get in the way of broader retirement and financial security for American workers going forward. We believe that our interpretation of these intra-plan service crediting rules don't apply to PEPs is consistent with the SECURE Act which notes that unrelated employers can participate together in a PEP. You're looking at newly added Code Section 413(e), it states each employer in a plan, which has a Pooled Plan provider shall be treated as the plan sponsor with respect to the portion of the plan attributable to employees with such employer. So, if the language that I just cited doesn't apply in this context, the service crediting I don't know in which context and circumstances it should apply. The American Benefits Council issued a letter to your aid back on November 20, 2020, a little over a year and a half ago, that we think spelled this issue out very well in our opinion. The second reason that we believe our interpretation with regard to the service crediting is appropriate is that it is consistent with the congressional intent of the SECURE Act. AON and I personally spent lots of time on the Hill in the years leading up to the passage of the SECURE Act and discussion of recent Retirement Enhancement Savings Act and then SECURE and in all those discussions the intent was really to increase retirement plan coverage and make 401(k) options more readily available and effective for employers and employees alike. And again we think that service crediting interpretation stands in the way of that and we also believe that ABC's November letter of 2020 addresses these points very well in addition to that. And, lastly, we think that our interpretation as noted earlier supports broader retirement plan coverage and retirement security for American workers. This intra-plan service crediting isn't what employers need to more broadly offer and improve their retirement plans. They want cost effective, easy, and high quality 401(k) solutions but, they aren't asking for this broader service crediting across a group of unrelated employers which can produce extra costs for the benefits delivered from that additional service crediting, extra costs for administration, and I would argue — I'll call it needle in a haystack outcomes, whereby happenstance somebody is benefitting from the provision rather than being part of an outcome of human resources strategy, talent management strategies or even public policy. We think that the interpretation and the preamble to the proposed rules will be harder to communicate, including the likelihood of people working side-by-side having disparate treatment even though their employment situations might otherwise be identical. We think it will be harder to administer the plans for full-plan providers and employers. Just imagine how eligibility files just got a little bit more complex and larger to handle this issue, and we also doubt whether most participants will even know that they're eligible for the additional service crediting and alert their employers to those situations where warranted.

I also fear that the application of this intra-plan service crediting could lead to more and smaller PEPs to reduce the likelihood of it happening, or you believe the smaller the PEP in which somebody is participating reduces the likelihood that this intra-plan service crediting will be applicable but smaller PEPs and more PEPs could further increase costs and reduce the economies of scale that really the whole vision that Congress had in sights would pass the SECURE Act was based on. You know, we're finding that PEPs are already broad. There's a variety of industries and geographies already in our PEP. I can't imagine that Paychex's experience with 10,000 contributing employers is any different. So, they're already broad so again having this with the benefit based on happenstance or a needle in a haystack type of outcome is really unfortunate in our opinion. One last point is that employers could still grant service across a PEP on a voluntary basis within subset of organizations. Again, on a voluntary basis to deliver the human resources strategy outcomes that they're interested in. So, I will leave you with the thought that PEPs are working. They're making it much easier for employers to provide a high-quality 401(k) benefit for their workers and improved retirement outcomes in the process, and the people involved in that are telling us it's working. The end user participants participating in the AM PEP have an over 97 percent participant satisfaction rating. Participating employers are rating at 9.0 out of 10 on the ease of implementing the PEP and 9.4 out of 10 on their likelihood to recommend our PEP to other employers. So, again, PEPs are working, and we think that common sense rules consistent with the intent of the SECURE Act should be implemented, to really continue the momentum. So with regard to this service crediting issue, we respectfully request that the statement be removed from the preamble and as necessary a thorough vetting process be used to understand the issues and the implications. Again, we believe it could be very important to the retirement security of Americans going forward as long as the future of PEPs and delivering that. So, thank you very much for the opportunity to share these thoughts with you today, and I look forward to further discussion.

MR. EVANS: This is Bill Evans again from Treasury. Could I ask a question?

MR. JONES: Absolutely.

MR. EVANS: I think I understand — see if I'm understanding the argument — a couple of the arguments for the service crediting issue. One would be that I think you're saying that sort of unrelated, you know, unrelated employers sort of face a different — different difficulties than unrelated employers in a PEP or in a MEP face different recordkeeping and with respect to service crediting particular issues and sort of traditional MEPs, and so I think arguing that sort of from a practical and policy standpoint, there should be different rules there. I think that's one — kind of one argument, and then I think I'm hearing, so you're saying that you and maybe you're the right person to have this — ask this question. You said that you are — you know, spent time on the Hill working on this proposal. I mean did this topic of service crediting come up sort of before passage of the bill or was it more of, you know, as you move to implement what passed, realized that this was an issue — I mean was it — was this discussed — was this topic discussed and is there sort of legislative history that we should be aware of that you could point to or that, you know, might be helpful for us?

MR. JONES: It was not discussed in my experience with numerous meetings on the Hill, but the broad strategy was to make the benefits of standalone 401(k) plans available to a broader group of people and to offer greater economies of scale. The objectives that I heard was not related to broader portability within the system for American workers. Again, the objective was let's extend and expand the benefits of 401(k) plan coverage as we know it for half of the private sector, frankly to the other half of the private sector that wasn't covered by or isn't covered by employer sponsored retirement plans. But, again, it wasn't in the vein of broader portability across your career any more than, you know, 401(k) plans operating for individual employment relationships are in effect today for 60 million workers.

MR. EVANS: Mm-hmm.

MR. JONES: And then, you know, we as a community — a PEP community if you will, started to unpack the 413(e) and 413(c), and I, you know, sought to clarify in operating good faith. So, again the — we believe the intent was never anything more than let's extend the benefits of the existing 401(k) system to a broader reach.

MR. EVANS: Mm-hmm. And I get this just so you don't think I wasn't listening, yeah, you are pointing to a statutory provision the section on plan sponsors. Are employers being treated as plan sponsors. I guess I was trying to get a sense whether that was sort of drafted, you know, in connection with this service crediting issue, or whether it was more, oh as you sort of work through the issues you able to look at this and say, oh this looks like this might be an answer to our administrative problem.

MR. JONES: And I think — I think Kent Mason who I know is next up along with Courtney, can speak to that as an attorney —

MR. EVANS: Yeah.

MR. JONES: But again, I think that the intent was always extending the reach of tax qualified retirement plans and not offering additional portability with them in the system.

MR. EVANS: Right.Thanks, Rick. Thanks for answering my questions.

MS. LEVY: Thanks. Any further questions from the Environment Group?

SPEAKER: On the phone lines please press 1 then 0.

MS. LEVY: Yeah, I think this is just for questions from members of the IRS Chief Council and Treasury. And if we don't have any further questions, then thank you so much to Rick Jones, and we can move on to the prepared comments. Courtney Zinter and Kent Mason from Davis & Harman on behalf of the American Benefits Council.

MR. MASON: Well this is Kent and I think Courtney will back clean up here. So, I am Kent Mason with Davidson — with the law firm of Davidson & Harmon, Courtney and I are here on behalf of the American Benefits Council. Thank you very much for holding this hearing. Thanks for the opportunity to testify. The American Benefits Council has long been supportive and dedicated to expanding coverage, and we believe that PEPs and MEPs are just a very important tool in sort of that expansion. And I think, you know, that the discussions by Rick and Zach have been very sort of evidence that this is working. So, thank you for issuing these proposed regulations, which are really important to the continued growth of PEPs and MEPs. We think that's a great step forward. I'm actually going to be talking, sort of following up on Rick's point about service crediting. You know, I think we all recognize that in a MEP that is not a PEP service for one employer in the MEP counts a service for all other employers in the MEP for purposes of eligibility investing.

I think the question obviously, is does that rule carry over to the PEP context? And, you know, as Rick was sort of suggesting, our interpretation of the statute is that the statute is clear that, that cross servicing credit, cross service crediting does not apply to PEPs. And again, sort of quoting sort of Code §13(e)(3)(D), except with respect to the administrative duties of the pooled plan provider. And I'm just doing a few little ellipses here.

Each employer in a plan shall be treated as the planned sponsor with respect to their portion of the plan. So, the question is, is service crediting an administrative duty? Well, clearly not, it's a substantive requirement. So, that means that the statute is clear that each plan sponsor is treated as a separate, excuse me, participating employer, is treated as a separate plan sponsor for purposes of PEPs. Clearly overriding the 413(c) rules, explicitly overriding the 413(c) rules because — and each in the normal rules, every plan sponsor does not give, is not required to give eligibility and service credit for participation with — for employment, with another unrelated employer.

So, under the statute, it seems very clear that the cross service crediting rules do not apply to PEPs. So, then we sort of see in the preamble to an unrelated regulation, we see one sentence that says, oh yes, the cross service crediting rules for MEPs do apply to PEPs. In other words, not related to the subject at hand, just one sentence in the preamble. And I think just frankly, and effectively, we were very, very surprised by that.

It is contrary to the statute as we just talked about. There really isn't a sort of an argument in terms of how do you explain 413(e), (e)(3)(D), unless it sort of does override these rules. So, but I think there's also a more troubling process point that I think is really important. And that is to us putting this in the preamble without going through the formal notice and comment process appears to us to be a violation of the Administrative Procedure Act. In other words, the Administrative Procedure Act distinguishes between legislative rules and interpretive rules.

And with respect to interpreter rules, you don't need the formal notice and comment process. With respect to legislative rules, you do. So, the question is, is this preamble statement, a legislative rule, or an interpretive rule? And in our view, it's clear it's a legislative rule. The — one of the leading cases in this area — actually, I know we can send you the site if that's helpful, which is American Mining Congress v. Mine Safety Health Administrators [sic], says that one of the telltale signs of a telltale signs of a legislative rule is that without that rule, the IRS could not enforce the requirement. In other words, you need that rule issued in order to enforce it.

So, in that context, this is clearly a legislative rule because the statute is number one is clear that there is no cross service crediting. And number two, even if the statute is read to be ambiguous, there's another provision for 13(e)(4)(B), which provides that until the service and Treasury issue guidance, it's reasonable, good faith compliance is sufficient. So, even if you argue that the statute is ambiguous on this point, it is at a minimum, could be read either way, which means that reasonable, good faith compliance would be consistent with not giving service crediting.

So, if the service tried to enforce this prior to issuing this preamble, it could not have done so, because at a minimum, it is reasonable, good faith compliance. Thus, this rule in the preamble is a legislative rule that did not go through the administrator. It did not go through formal notice and comment and formal notice and comment rulemaking process. And accordingly, this is a violation of the Administrator Procedure Act. And in that light, we would respectfully ask that this comment in the, as Rick said, this comment in the preamble be withdrawn, and it be sort of clarified that this issue will be sort of analyzed further under a, if it is analyzed, under formal notice and comment procedure. So, that's my story and, you know, I think Courtney will take it up and notch and be a little more passionate than I am, but — so Courtney, I'm turning it over to you.

MS. ZINTER: Yes. Thanks, thanks Ken. That's what I'm known for. Good morning, this is Courtney Zinter, also with Davis & Harmon, and also here on behalf of the American Benefits Council. Just want to echo Kent, thanks for holding this hearing today. With the few minutes that we have left, I'm going to focus my testimony on the proposed regulations themselves that would implement the exception to the Unified Plan Rule. First, I just wanted to express the Council's appreciation for the ways in which this recent proposal takes into account and reflects several comments that were submitted by the Council, as well as others back in 2019 on what was the previous Treasury and IRS proposal to provide One Bad Apple Relief. That, of course, was the one issued prior to the SECURE Act enactment. I won't go through all of the ways in which the new proposal responds to several of those previous comments from 2019. The preamble already does a nice job of highlighting some of the changes that were made, but, for example, the Council members appreciate that. There was some movement in the recent proposal towards helping to simplify and preen line the conditions for relief such as reducing the required time between notices from 90 days as proposed a couple years ago to 60 days with the recent proposal.

We had just a handful of additional requests with respect to some of these aspects of the proposal that took into account comments from 2019. So, just to mention one quick example again, we appreciate that the preamble states that Treasury and IRS responded to requests to provide model amendments by saying that that is something that you would be doing. And just as one follow up to that, we'd we just ask that any model language be published in time, so that any plans choosing to use that language would have time to incorporate it, ideally by the time final regulations become applicable.

There are a couple of other comments I'd like to touch on briefly. They're explained more in the letter the Council submitted last month. First, regarding the effective date of final regulations, as well as good faith reliance, we would ask that the effective date be extended until at least 18 months after the issuance of the final regulations. And to go along with that, we'd ask for further clarification that reliance on a good faith, reasonable interpretation of 413(e) is broader than simply complying with the proposed regulations, or even what was proposed in 2019. We've heard from Council members saying, you know, we've dealt with this issue for years. We have reasonable processes and procedures in place. So, that should be sufficient until final regs take effect.

And then lastly we would ask you to use your authority to expand the availability of the proposed relief to 403(b) MEPs, as well as defined benefit MEPs and 403(a) MEPs. These other types of MEPs offer the same types of benefits that MEPS under 401(a) offers, such as economies of scale that we've talked about today, administrative simplifications, and so on. And so it's our view, that's the One Bad Apple Relief should be available to them as well.

Now, if we — with respect to the 403(b) MEPs in particular, here we would suggest in the alternative that you could simply clarify that nothing similar to the Unified Planned Rule applies to 403(b) MEPs since before 3(b) regulations don't actually incorporate the Unified Planned Rule as it's set forth in the 413 Regs. So, I will conclude with that and once more, thank you for your time today.

MS. LEVY: Thank you. Any questions for either Courtney then, direct technicians from (phonetic) Government (inaudible)?

MR. EVANS: Could I ask that question? This is Bill — that question to Courtney. When you talk about wanting to have rules apply to 403(b) plans in particular, I take it the argument would be, is not that 413(e) applied to 403(b) plans, but that we have — the Government has authority to issue exceptions to a Unified Plan Rule and to go ahead and exercise that authority. Is that sort of the — is that the idea behind the 403(b) expansion?

MS. ZINTER: Yes. And I'll let Kent maybe chime in here too, but I think there's been maybe some questions about whether something similar to the Unified Plan Rule applies to 403(b) MEPs and so just getting some clarification either that if there's something similar then, you're similarly provided with relief or just, no, you don't need to worry about something like the Unified Plan Rule in this context. So, just to make it clear either way.

MR. EVANS: Mm-hmm. And then could I ask Kent a question. So —

MR. MASON: I'm around. Yeah.

MR. EVANS: So, I think I understood and appreciate your comments on the service crediting. And I understand the argument that the statute is, the 413(E) statute is clear, yeah, where it talks about each employer being their own plan sponsor. And I see if I've got the gist of the argument is that that turns off 413(c)(3), which is the rule requiring investing service to be credited.

And I guess I have sort of a hard time anything that you could do to help me, to see sort of how 413(c)(3) is turned off by that language would be helpful. Because if you look at 413(c)(3), there really isn't any discussion about planned sponsors. So, it's sort of hard to exactly — it's hard for me to exactly understand the argument that 413(c)(3) is turned off. Anything you could do to help with that would be great.

MR. MASON: Yeah. I mean, I think — I've heard the argument that you have to meet 413(c) in order to be a PEP. And I mean, that argument is just technically wrong. I mean, in the sense that you have to meet 413(c) as modified by 413(e). In other words, if it just says you have to be a 413(c) plan, there would be no such thing as a PEP because 413(c), so it wouldn't contemplate sort of the changes made by the PEP rules. So, you have to read 413(c) in the context of 413(e).

And I guess the question is what content so, I mean, I don't mean to sort of turn a question on you, but what possible content by issuing that one sentence in the preamble, what possible content is the Government giving to 413(e)(3)(B)? As far as I can tell zero. You're essentially saying that provision just must have been a mistake, and we're not going to sort of read it as meaning anything. And so what we're really saying is that's basic — that's contrary to sort of fundamental statutory interpretation. It has to have a meaning. It has to have an intent. And if you read the plain language, each plan sponsor is treated as, each employer is treated as a separate plan sponsor.

And so I think my question to you, Bill would be, if every one of them is a separate plan sponsor, what authority do you have to require separate unrelated plan sponsors to give cross service crediting? I think you have none of that. And so I really turn around to say, what possible authority do you have, in line of the fact that these are separate plan sponsors to sort of require cross service crediting. I don't think you have any.

In just the same way, Davis & Harmon has a plan. We don't have to give service credit for anybody else because we're a separate plan sponsor. Every employer in in a PEP is a separate plan sponsor, and that, I don't see any authority to require cross service crediting. Does that help, Bill, or is that just — yeah.

MR. EVANS: Yeah. You're not sure. Well, everything helps, obviously, you all are very, very helpful to have comments and have thoughts. So, but I mean —

MR. MASON: What is the basis — what — how do you interpret 413(e), (3)(d), that's my question? Sort of, how do you give content to it? And I'm not trying to say you have to answer that question, but I mean, that's really the issue. And basically the preamble says we give no content to it. And to do that in a preamble, to say in a preamble that a provision of the code has no meaning. To do it in a preamble without notice and comment is — I've just never seen that before.

MS. LEVY: This is Rachel Levy. Just to address the APA (phonetic) comments that you're making Kent. I don't think this is the appropriate forum for a back and forth, but I will say because this is a matter of public record that, of course, we have been in touch with our APA experts within PNA here at IRS Chief Counsel and everything we're doing is in consultation with them. So, we will, of course, be complying with our understanding of the procedural requirements.

MR. MASON: Right. But I do think that part of this process is really important for there to be a dialogue. In other words, I have — I'm sure your experts are great at the APA. We have a different perspective on APA compliance. And I think that's part of this process is to sort of just —

MS. LEVY: So, Kent —

MR. MASON: — can air that difference.

MS. LEVY: So, this is part of the notice and comment process. We issue proposed regs and now we're doing it, we issued, we asked for comments. This is the whole part of the notice and comment process. So, when you say without notice and comment —

MR. MASON: Oh, no, no.

MS. LEVY:So, I understand what you mean.

MR. MASON: No. Oh, absolute — no, no. It's very, very different, absolutely, completely different.

MS. LEVY: — processing that (phonetic).

MR. MASON: Yeah, yes. In other words, when you put something into the preamble, you were saying, this is and has always been the law.

Okay? So, back to the beginning of 2021, this has always been the law. That is not how the APA works. The APA says that when you sort of do something that's subject to a rule, subject to notice and comment, it can only be perspective. So, you put something into the preamble that you made retroactively effective without notice and comment. In other words, by saying, putting it in the preamble, you make it retroactively effective. There is no sort of prospectivity (sic) as required by the APA. There's no sort of notice and comment on a full-fledged proposal. This is completely different.

This is a violation because you didn't go through and propose a rule that would be prospectively available, applicable. This — you made it retroactively applicable. And that's a huge difference, especially in light of the fact that under the rules prior to the issuance of new requirements, there's good, reasonable, good faith compliance. By putting in the preamble, you're saying, we're taking away your reasonable, good faith compliance, retroactively.

MS. LEVY: Panelists if you have anything more to add, please do. Otherwise again, this is Rachel Levy and I will just thank you Kent, for your comments here and your thoughts and say that we are, of course, acting under Council of what our APA requirements are. We will meet those as required by law. Any other comments for Kent or Courtney? Okay. Thank you so much. I believe that is the end of the prepared remarks by the by those who are commenting and with that, I'll turn it over to the moderator to see if there are anybody, anybody in the audience who would like to make any comments. I'll remind people that they could please keep it as brief as possible and be that anything you say will be a matter of public record.

MODERATOR: Ladies and gentlemen in the audience, please press one, then zero on your telephone keypad. Once again, please press one zero on your telephone keypad. One moment, please. Once again, for any comments or questions, please press one zero. And you do have a question or comment. One moment, please. We'll go to line 32, please state your first and last name.

MS. BROWN-WEEGIN: Good morning. My name is Elizabeth Brown-Weegin.

MODERATOR: Please go ahead with your question or comment.

MS. BROWN-WEEGIN: Thank you. I'm a colleague of Rick Jones at AON, and I just wanted to add one technical point for the consideration of the panel. And it relates to the conversation that you folks engage with both Rick and Kent on the service crediting aspect. We look at the regs and the notice and comment process that has been a very robust comment, notice and comment process as relating to the Unified Plan. And we have robustly engaged with that. The service crediting, as we might say, came out of left field. And I just wanted to point out that those regulations essentially articulating the rules of 413(c) predate much of the changes in the Code. Certain aspects that were picked up in the new proposal. We would invite and obviously at echoing Kent's comment that this particular aspect be thoughtfully addressed.

I think the fact that those regulations well predate a lot of what has gone on in both the retirement community universe and with regard to multiple employer plans as evidenced by the Secure Act that is on the book and the other potential secure like act that is being considered in Congress today. Thank you.

MODERATOR: There are no additional questions or comments at this time. Please continue.

MS. LEVY: Well, if we have no additional questions or comments I will thank all of the Government panelists for joining as well as our presenters. And thank you all very much. I think we can end.

(Whereupon, at 11:05 a.m., the PROCEEDINGS were adjourned.)

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