Simplify Proposed Multiple Employer Plan Regs, Company Says

August 30, 2019

Internal Revenue Service
U.S. Treasury Department
1111 Constitution Avenue N.W.
Washington, D.C. 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:

The Transamerica companies (“Transamerica”)¹ are pleased to provide comments on the Treasury Department and Internal Revenue Service's (“IRS”) “Notice of Proposed Rulemaking regarding an exemption to the application of the “unified plan rule” (the “unified plan rule” or “the one bad apple rule”) for a defined contribution multiple employer plan (“MEP”) published in the Federal Register on July 3, 2019 and referenced above (the “Proposed Rule”). Transamerica commends the IRS for its work in addressing the one bad apple rule which has unnecessarily provided a significant disincentive to many employers to joining a MEP.

Transamerica is focused on helping customers achieve a lifetime of financial security. Transamerica products and services help people protect against financial risk, build financial security and create successful retirements. Transamerica designs customized retirement plan solutions for both for profit and non-profit businesses nationwide. Transamerica provides services for over 29,000 plans that collectively include over 8 million participants and represent over $200 billion in plan assets as of December 31, 2018. Multiple Employer Plans comprise 277 of these plans for approximately 13,000 employers, with a combined total of 1,253,526 participants and represent a total of $34.5 billion in plan assets.

Summary

Transamerica welcomes the IRS' proposal to provide MEPs an exemption from the application of the unified plan rule pursuant to the direction give it by the President's August 31, 2018 Executive Order on Strengthening Retirement Security in America. The Executive Order directs the Treasury Department to revise or eliminate rules that impose costly regulatory burdens and complexity on businesses, especially small businesses, in establishing workplace retirement plans. As explained more fully below:

MEPs Provide Opportunities for Expanding Retirement Plan Coverage

Employer-sponsored defined contribution plans play a critical role in facilitating employee savings. The workplace retirement savings system has succeeded in serving as the preferred method of saving for retirement for millions of workers. With the benefits of saving in an employer-sponsored plan governed by ERISA (e.g., investment education, the potential for employer contributions, and fiduciary oversight), combined with the convenience of automatic payroll deduction, Americans are far more likely to save for retirement through participating in a workplace-sponsored retirement plan than through alternate savings structures. According to research from nonprofit Transamerica Center for Retirement Studies® (TCRS), 87 percent of workers who are offered a 401(k) or similar plan are saving for retirement, either through the plan and/or outside of work, compared to just 50 percent of workers who are not offered such a plan.²

For employers, especially small businesses, for which a stand-alone defined contribution plan is not feasible, the MEP offers an attractive solution by addressing the primary reasons that employers do not establish workplace retirement savings plans for their workers: cost, administrative burden and fiduciary liability concerns.

The TCRS 18th Annual Retirement Survey of employers found that while 92 percent of large companies with 500 or more employees and 86 percent of medium-sized companies with 100 to 499 employees offer a 401(k) or similar employee-funded retirement plan, only 59 percent of small companies with five to 99 employees do so. Among companies that do not offer a 401(k) or similar plan, only 27 percent say that they are likely to begin sponsoring a plan in the next two years. Among those not planning to do so, their most frequently cited reasons are: company is not large enough (58 percent), concerns about cost (41 percent), employees are not interested (22 percent), and company or management is not interested (17 percent). However, an encouraging indicator is that 25 percent of those not likely to offer a plan say that they would consider joining a multiple employer plan (MEP) offered by a vendor who handles many of the fiduciary and administrative duties at a reasonable cost.³

The cost advantage of a MEP is realized by achieving economies of scale, both in terms of the number of plan participants and assets. Additional savings are achieved by spreading the cost among all the participating employers in the MEP. While the actual cost savings will depend on the number of participants, total assets, demographics of underlying adopting employers in a MEP and other variables, the savings in the MEP will grow with scale.

The liability and administrative advantages of an employer are generally achieved by delegating to a professional named fiduciary and plan administrator, respectively, the responsibility for operating the MEP. By delegating the responsibilities to professionals with the expertise and systems to operate and comply with legal requirements of operating a MEP, the quality of the MEP market is enhanced.

Removing disincentives to employers to join in a MEP will increase coverage

Despite the advantages of MEPs, many employers are reluctant to join a MEP for fear that even if they fully comply with the MEP and ERISA requirements, they will still be liable for any acts or omissions of another employer in the MEP over which they have no control.

As noted above, one of the benefits of a MEP is the ability of an employer to delegate the fiduciary liability of maintaining a plan to a named plan fiduciary. However, because of the unified plan rule, employers are not absolved of liability of those acts over which it has no control. Employers considering setting up a plan for their employees still face liability for the omissions of a fellow employer in the plan in terms of having the entire MEP disqualified.

While the incidence of one employer's actions causing the entire MEP to be disqualified is rare, that unfortunately is not comforting to many small business owners who very understandably do not want to incur any risk attributable to unrelated employers.

The procedures for complying with the notice requirements of the exemption should be modified.

Transamerica agrees with the three-notice requirement in the event of a potential qualification failure. The three notice requirement is the appropriate means of ensuring that the affected participating employers and their employees are aware of the adverse consequences if the unresponsive participating employer neither takes appropriate remedial action nor initiates a spinoff. But we have two recommendations for consideration.

Reduction of 90-day periods to 60 days. First, we recommend that each of the three 90-day periods — after the first, second, and third notices — be shortened to 60 days. Our concern is based on the fact that so many of the compliance issues in a MEP relate to struggling companies that are facing survival issues and cease communicating with the MEP administrator. In that context, there is generally substantial turnover and attrition within the employer's workforce, leading to increased risks that participants will move and will be difficult to find. The longer a MEP administrator has to wait to deliver benefits to the participants, the greater the risk that the participants cannot be found and will not receive their benefits.

On the other hand, we strongly believe that the employer should have an opportunity to correct its failures. So the right answer in our view is to ensure employers have enough time to correct, but not too much time so that the risk of losing participants increases too much. The proposed regime would require too much delay in our view: (1) a period of time attempting to communicate with the employer before even the first notice is provided, (2) up to 120 days before the second notice, (3) up to 120 days before the third notice, (4) up to 90 days waiting for the employer to correct, and (5) time to implement a correction. This is too much. If each of the 90-day periods is reduced to 60 days, the cumulative time for an employer to correct a failure would still be more than sufficient.

Six notices is too many. Transamerica believes that no more than four notices should be required. Under the proposal, if a potential qualification failure becomes a known qualification failure after three notices, then up to three more notices are required, for a total of six. This seems an unnecessary burden on the MEP and would also exacerbate the lost participant issue discussed above. Transamerica urges the IRS to require no more than a total of four notices, so that in the above situation, only one final or fourth notice would be required. Such final notice, along with the preceding three notices, should be deemed to satisfy the notice requirement for a known qualification failure.⁴ 

This fourth or final notice should be sent to the unresponsive employer, its employees participating in the plan and the IRS within a reasonable period after the administrator has determined that there is a known qualification failure. With respect to the contents and recipients of the fourth notice, the rules of the third notice with respect to a known qualification failure should apply.

On the other hand, we recognize that once a failure is identified, the employer may need time to implement the correction. So after the fourth notice, the employer should be provided with 180 days to correct the known failure before the MEP administrator must take steps to implement a spinoff.

The procedures for complying with the spin-off and termination requirements for a plan with a known qualification failure should be simplified.

Transamerica urges the IRS to permit the spin-off and termination of a plan with a known qualification failure in one step rather than two. The requirement for the 413(c) administrator to first spin off the plan with a known qualification failure and then to terminate the plan is not necessary and adds to the complexity of complying with the exemption.

As noted in the preamble, distributions made from a spun-off plan that is terminated would not, solely because of the participating employer failure, fail to be eligible for favorable tax treatment accorded to distributions from qualified plans, including their eligibility to be treated as rollovers from a qualified plan. The continued tax qualification of distributed assets is critical to helping plan participants preserve their retirement savings by rolling them over to an IRA or other qualified plan, and should be affirmed in the final rule.

The spinoff/termination can be done in one step, by simply terminating the portion of the plan attributable to the unresponsive employer. In such a situation, there is a deemed spinoff, since that portion of the MEP could not be terminated without being spun off first. Requiring the spinoff to a separate plan and termination to be done in two separate steps would add unnecessary costs to the transaction that would in this situation generally be borne by the employees.

For example:

• The existing MEP documents would not have been approved as single employer plan documents, thus triggering a need for a determination letter request.

• Even though the single employer plan would be immediately terminated, distributions would not be immediate, triggering a possible need for a variety of disclosures (with respect to a separate plan with a different reviewing fiduciary), such as fee and investment disclosures to participants, ERISA section 408(b)(2) notices, benefit statements, and summary plan descriptions.

• Form 5500 filings would need to be made, including an auditor's opinion where required.

There is clear precedent for collapsing two steps into one step where requiring a two-step process would be unnecessary and disruptive. For example, Regulation section 1.414(l)-1(o) permits plan to plan transfers, even though technically such transfers are spinoffs followed by mergers. In the transfer context, the spun-off plan would exist for an instant before it is merged into the transferee plan. This would be a meaningless step that the law appropriately does not require. Similarly, in the case of a MEP where the 413(c) administrator decides to spin off and terminate an unresponsive employer's plan, the spun-off plan would only exist for an instant before it is terminated. There is no apparent policy reason to require such a meaningless step.

Secondly, the requirements for a spinoff/termination are an issue outside the context of maintaining the qualified status of the MEP. Such one-step spinoff/terminations from MEPs have occurred pursuant to explicit provisions in existing MEP documents, which have been approved by the IRS many times. This has been an effective means of avoiding material unnecessary costs for employees.

The IRS' proposed exemption from liability for a MEP should be extended to 403(b) MEPs.

There is a lack of clarity regarding the extent to which the one bad apple rule currently applies to multiple employer 403(b) plans. We would ask Treasury and the IRS to consider (1) clarifying that it does not apply, or (2) extending the current proposal to 403(b) MEPs. Section 403(b) MEPs have been developed in the model of Section 401(a) defined contribution MEPs.

All of the reasons for elimination of the 'one bad apple' rule in 401(a) MEPs apply equally to 403(b) MEPs, and the same rules for elimination of liability should be applied to 403(b) MEPs.

Model amendments.

It would be very helpful for the IRS to publish model amendments that plans — both pre-approved and individually designed — could use to satisfy the requirement that the plan document must describe the procedures to be taken if there is a “participating employer failure.” Such model amendments would promote compliance, remove uncertainty, and eliminate unnecessary burdens.

Conclusion

Transamerica commends the IRS for taking action to eliminate the unified plan rule which serves as a disincentive to employers that would otherwise considering joining a MEP. MEPs are a significant tool in helping more businesses provide retirement plans for their employees. The comments herein support the IRS proposed rule, and suggest modifications to further simplify the proposed rule.

Transamerica appreciates your consideration of these comments. Expanding retirement plan coverage among small businesses and working owners is a critical to enhancing retirement security of individuals.

Sincerely,

Kent Callahan
Senior Managing Director
Transamerica — Workplace Solutions
Distribution & Client Engagement
Atlanta, GA