Fidelity Focuses on Impediments to Multiple Employer Plan Formation

October 1, 2019

Internal Revenue Service
CC:PA:LPD:PR (REG-121508-18)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: Multiple Employer Plans [REG-121508-18] RIN 1545-BO97

Ladies and Gentlemen:

Fidelity Investments¹ (“Fidelity”) appreciates the opportunity to provide comments on the proposed regulation (“Proposal”), published by the Internal Revenue Service and the Treasury Department (“IRS” or “Treasury”) in the Federal Register on July 3, 2019, which provides an exception (“Exception”) to the “unified plan rule” for defined contribution section 413(c) plans (multiple employer plans or “MEPs”) in the event of the failure by an employer participating in the MEP to satisfy the Internal Revenue Code's plan qualification requirements.² As one of the nation's leading retirement services providers, Fidelity has a deep and long-standing commitment to working with the Treasury on its rulemaking in the area of expanding access to retirement plans, plan formation and plan compliance.

Fidelity believes that facilitating the formation of MEPs is of vital importance in helping to expand access to workplace retirement plans, particularly among small employers. As the Treasury indicated in the Proposal, 30% of American workers lack access to an employer sponsored savings vehicle. This is particularly true for employees at small firms who are roughly half as likely to have access to a retirement plan compared to employees at large firms.³ Industry research has shown that 58 million American employees (48% of all U.S. employees) work for small businesses, yet 32 million small business workers do not have access to an employer-sponsored retirement plan.⁴ In addition, only 22% of workers at companies with fewer than 10 employees report having access to a workplace retirement plan compared with 74% of workers at companies with at least 500 employees.⁵ In order to achieve the goal of expanding retirement plan coverage for American workers, both legislative and regulatory efforts are needed.

We appreciate the Treasury's efforts in promulgating this Proposal which would provide a valuable exception to the unified plan rule (also known as the “one bad apple” rule). Under the Exception, a MEP would not be disqualified on account of a participating employer failure, provided that certain conditions are met.

However, we believe that the Treasury could make certain modifications to the current Proposal that would further facilitate the formation of MEPs as set forth below. Since the unified plan rule is one of the primary impediments that currently discourages small employers from adopting MEPs for their employees, the Treasury should ensure that any exceptions to this rule are truly impactful to small employers and will encourage MEP plan formation. This of course would be consistent with the policy directives articulated by President Trump in his Executive Order.⁶ While beyond the purview of the Proposal and this letter, we also believe that legislation is needed to remove additional impediments to MEP plan formation and establish a lasting foundation upon which MEPs can be established for the benefit of workers in America's small businesses.

1. Eligibility for Exception to the Unified Plan Rule

One of the central conditions to the Exception is that the MEP not be “under examination” as of the date the first notice is provided to an “unresponsive participating employer.” An “unresponsive participating employer” is a participating employer that “fails to comply with the reasonable and timely requests from the section 413(c) plan administrator for information needed to determine compliance with a qualification requirement or fails to comply with reasonable and timely requests from the section 413(c) plan administrator to take actions that are needed to correct a failure to satisfy a qualification requirement as it relates to the participating employer.” A plan is “under examination” if, among other things, “a section 413(c) plan administrator, or an authorized representative, has received verbal or written notification from the Employee Plans Office of the Tax Exempt and Government Entities Division of the IRS (“Employee Plans”) of an impending Employee Plans examination, or of an impending referral for an Employee Plans examination.”

This condition creates a tension between, on the one hand, communications between a section 413(c) plan administrator and a participating employer necessary to determine whether a potential or known qualification failure exists (and whether the participating employer is unresponsive) and, on the other hand, a communication from Employee Plans to a section 413(c) plan administrator regarding an examination. The former communications will likely take place over a period of days, weeks or potentially even longer depending on the circumstances, while the latter will be instantaneous. That is, communications to determine whether and what plan failure may have occurred and whether the participating employer is unresponsive will take time, but a plan can come “under examination” at any time and without notice since “under examination” status can be triggered by a mere telephone call or other verbal or written communication from Employee Plans to a section 413(c) plan administrator.

The effect of this tension will be to greatly increase the exposure and fiduciary burden of the section 413(c) plan administrator to the participating employers of the MEP generally, since the section 413(c) plan administrator is responsible for sending the notices required for the Exception under the Proposal. This exposure will in turn incent the section 413(c) plan administrator to send the notices contemplated under the Proposal as soon as there is any possible chance that a known or potential failure may exist or the participating employer may be unresponsive. Otherwise, the section 413(c) plan administrator risks losing the Exception for the plan and thus subjecting all participating employers to potential plan disqualification by having failed to send the initial notice before it receives a telephone call, or other notification, from Employee Plans putting the MEP under examination.

We believe that this will lead to unnecessary cost as well as confusion and a poor relationship as between participating employers and section 413(c) plan administrators. This could be easily avoided by modifying the Proposal's eligibility conditions to provide that the section 413(c) plan administrator must have begun to determine whether a participating employer is an “unresponsive participating employer” as defined in the Proposal before the MEP is “under examination” as defined in the Proposal, rather than providing that the section 413(c) plan administrator must have provided the first notice described in paragraph (g)(4)(i) of the Proposal. That is to say, the Proposal should be modified to provide that, before the MEP is under examination, the section 413(c) plan administrator must have requested from the participating employer information needed to determine compliance with a qualification requirement or must have requested actions needed to correct a failure to satisfy a qualification requirement as it relates to the participating employer.

By making this change, the Proposal would incent section 413(c) plan administrators to promptly engage in dialogue with participating employers regarding potential or known qualification failures, which would in turn start the corrective processes contemplated by the Proposal. This change to the Proposal would allow the section 413(c) plan administrator to communicate in a reasonable and orderly way to determine whether a qualification failure exists and whether the participating employer is unresponsive, rather than prematurely providing a formal notice describing remedial actions that may not be fully understood at the time and threatening spin-off of plan assets and other potential negative consequences. This would also avoid cost, confusion and a poor experience for participating employers.

2. Responsive Participating Employers

Under the Proposal, the Exception only applies in the case of certain “participating employer failures.” A “participating employer failure” is defined as either a known qualification failure or a potential qualification failure.⁷ Both types of failures are predicated on the unresponsiveness of the specific participating employer in responding to requests by the plan administrator to either determine compliance with or correct a failure to satisfy a qualification requirement. However, “participating employer failures” should also encompass failures with respect to employers who are not “unresponsive”, i.e., “responsive” participating employers. A responsive participating employer may periodically make good faith mistakes causing qualification failures yet be willing and able to work with the section 413(c) plan administrator to correct them. Excluding responsive employers from eligibility for the Exception, however, will continue to expose all participating employers to plan disqualification based upon the failures of such other “responsive” participating employers. There seems to be no policy reason why the section 413(c) plan should not also be eligible for the Exception created by the Proposal simply because such participating employers are “responsive”. Indeed, excluding responsive employers would appear to reward “unresponsiveness” by providing relief from the unified plan rule where participating employers are unresponsive but not where they are responsive.

Accordingly, the Proposal should be revised to provide that the qualification of a MEP as a whole will not be jeopardized if, when the MEP becomes “under examination”, a participating employer is complying with reasonable and timely requests from the section 413(c) plan administrator for information needed to determine compliance with a qualification requirement or is complying with reasonable and timely requests from the section 413(c) plan administrator to take actions that are needed to correct a failure to satisfy a qualification requirement as it relates to the participating employer. Rather, under those circumstances, the Proposal should provide that the portion of the MEP relevant to that particular participating employer would be treated as if it were a separate plan with respect to the potential or known qualification issue (notwithstanding the fact that such portion of the MEP has not been spun off).

For example, assume a section 413(c) plan administrator suspects that a participating employer may have inadvertently excluded certain eligible employees from eligibility for the plan. Assume the section 413(c) plan administrator contacts the participating employer and raises the issue. Assume the participating employer promptly agrees and begins to take steps to address the qualification error and thus the participating employer is not an unresponsive participating employer to which the section 413(c) plan administrator should send the initial notice. However, assume that while the participating employer is taking those steps and before the error has been fully corrected, the MEP comes “under examination” within the meaning of the Proposal. In this case, it appears that the MEP would not be eligible for the Exception because, among other things, the participating employer is not unresponsive and the MEP has come under examination before the qualification error has been corrected. The Proposal should be revised to permit the Exception to continue to apply in such situations so that only the portion of the MEP related to that particular participating employer would be affected.

3. Plan document requirements

The Proposal requires that the section 413(c) plan document contains procedures that would be followed to address participating employer failures, including the procedures to be followed by the plan administrator if an unresponsive participating employer fails to take appropriate remedial action.⁸ As part of its final regulation, the Treasury should allow such procedures to be set forth in a document separate from the plan document, for example in the plan's Summary Plan Description or in separate administrative procedures maintained by the section 413(c) plan administrator for the plan. As a precedent for this change, the Treasury could leverage regulations issued by the Department of Labor (“DOL”) which require claims procedures to be provided as part of a plan's Summary Plan Description.⁹

4. Fiduciary safe harbor for section 413(c) plan administrators

Section 413 plan administrators have significant operational and administrative responsibilities under the Proposal in order to satisfy all of the conditions of the Exception. For example, under the Proposal, plan administrators are required to spinoff and terminate unresponsive participating employers who fail to take appropriate remedial action related to the plan. Plan administrators must notify participants who are employees of the unresponsive participating employer of the spinoff-termination,¹⁰ stop accepting contributions, and implement a spinoff of plan assets on behalf of the employees of the unresponsive participating employer. Plan assets must be spun off to a “separate single employer plan and trust that has the same plan administrator, trustee and substantive plan terms as the section 413(c) plan.” ¹¹ These requirements would appear to impose an ongoing duty on the plan administrator of the Section 413(c) plan to act as plan administrator of the spun off plan.

In order to protect section 413(c) plan administrators from fiduciary liability when agreeing to take on these duties and actions consistent with the regulation, a fiduciary safe harbor is needed. Such a safe harbor would serve to foster MEP plan formation since entities who sponsor such plans would be more willing to take on the role of section 413(c) plan administrators if they are adequately protected from fiduciary liability and risk.

Accordingly, we urge the Treasury to work with the Department of Labor to issue a fiduciary safe harbor. One approach would be to coordinate the Proposal's spinoff-termination provisions in Section 1.413-2(g)(7), with a safe harbor based upon the provisions of Labor Regulations Section 2578.1, which apply to the termination of abandoned plans. For example, the Department of Labor could provide a safe harbor for spin-off terminations where the section 413(c) plan administrator follows procedures with respect to the spun-off plan, similar to those set forth in regulations section 2578.1, as if the spun-off plan has been deemed to be terminated under subsection 2578.1(c).

5. Guidance on electronic delivery of notices

Under the Proposal, plan administrators of a section 413(c) plan are permitted to provide any notices in writing or in electronic form.¹² Notices provided to participants and beneficiaries can follow the rules prescribed under §1.401(a)-21 regarding the use of electronic media. In its final rule, Treasury should clarify that these electronic delivery rules can also be used for notices provided to participating employers.

We are available to discuss any questions you may have with respect to these comments or MEPs generally.

Sincerely,

James Barr Haines
Senior Vice President & Deputy General Counsel
Fidelity Investments
Boston, MA

cc:
Carol Weiser, Benefits Tax Counsel, U.S. Department of the Treasury
Preston Rutledge, Assistant Secretary for the Employee Benefits Security Administration, U.S. Department of Labor