IRS Provides Further Tailwinds to Open MEPs

The IRS has released proposed regulations that would relax the existing “bad apple rule,” which has been one of several impediments to open multi-employer plans (MEPs), which are defined contribution (DC) plans shared by more than one employer.

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The bad apple rule stipulates that the tax-qualified status of all the plans within an MEP could be revoked if one plan falls out of compliance. Although the rule has seldom been enforced, it has hindered the wider adoption of MEPs.

Under the proposal, the rule would still exist, though there would be exemptions. To qualify for the exemptions, MEPs would need to demonstrate they have procedures to promote compliance, and employers not in compliance have the opportunity to remedy non-compliance. If an employer remains out of compliance or is unresponsive, the MEP could spin off its assets and remove it from the plan.

The comment period for the proposed rule ends on Oct. 1.

Bottom Line: Although the rule is seldom enforced, the IRS’ openness to relaxing it represents another step, along with other proposals (such as the SECURE Act), that would potentially increase use of open MEPs.