Multiple Employer Plans, 31777-31795 [2019-14123]

Download as PDF Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules (d) Subject Air Transport Association (ATA) of America Code 28, Fuel. (e) Reason This AD was prompted by reports of cracks in the o-ring groove of magnetic fuel level indicators. The FAA is issuing this AD to address this condition, which, if not detected and corrected, could result in a severe fuel leak and consequent risk of fuel starvation. (f) Compliance Comply with this AD within the compliance times specified, unless already done. (g) Definitions (1) For the purposes of this AD, an affected part is any magnetic fuel level indicator having part number 35081587. (2) For the purposes of this AD, a serviceable part is an affected part that is new (not previously installed); or an affected part that, before installation, has passed an inspection in accordance with the instructions of Saab Service Bulletin 2000– 28–027, dated January 15, 2019. (h) Inspection Within 3,000 flight hours or 24 months, whichever occurs first after the effective date of this AD, remove and perform a one-time detailed inspection of each affected part for cracks in accordance with the Accomplishment Instructions of Saab Service Bulletin 2000–28–027, dated January 15, 2019. (i) Corrective Action If, during the inspection required by paragraph (h) of this AD, any crack is detected on an affected part, before further flight, replace that affected part with a serviceable part in accordance with the Accomplishment Instructions of Saab Service Bulletin 2000–28–027, dated January 15, 2019. (j) No Parts Return Although Saab Service Bulletin 2000–28– 027, dated January 15, 2019, specifies to return faulty parts to the manufacturer, this AD does not require returning the faulty parts to the manufacturer. jspears on DSK30JT082PROD with PROPOSALS (k) Parts Installation Limitation As of the effective date of this AD, it is allowed to install on any airplane an affected part, provided that it is a serviceable part as defined in paragraph (g)(2) of this AD. (l) Other FAA AD Provisions The following provisions also apply to this AD: (1) Alternative Methods of Compliance (AMOCs): The Manager, International Section, Transport Standards Branch, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the International Section, send it to the attention of the person identified in paragraph (m)(2) of this AD. Information may VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 be emailed to: 9-ANM-116-AMOCREQUESTS@faa.gov. Before using any approved AMOC, notify your appropriate principal inspector, or lacking a principal inspector, the manager of the local flight standards district office/certificate holding district office. (2) Contacting the Manufacturer: For any requirement in this AD to obtain corrective actions from a manufacturer, the action must be accomplished using a method approved by the Manager, International Section, Transport Standards Branch, FAA; or the European Aviation Safety Agency (EASA); or Saab AB, Saab Aeronautics’s EASA Design Organization Approval (DOA). If approved by the DOA, the approval must include the DOA-authorized signature. (m) Related Information (1) Refer to Mandatory Continuing Airworthiness Information (MCAI) EASA Airworthiness Directive 2019–0053, dated March 14, 2019, for related information. This MCAI may be found in the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA– 2019–0521. (2) For more information about this AD, contact Shahram Daneshmandi, Aerospace Engineer, International Section, Transport Standards Branch, FAA, 2200 South 216th St., Des Moines, WA 98198; telephone and fax 206–231–3220. (3) For service information identified in this AD, contact Saab AB, Saab Aeronautics, SE–581 88, Linko¨ping, Sweden; telephone +46 13 18 5591; fax +46 13 18 4874; email saab2000.techsupport@saabgroup.com; internet http://www.saabgroup.com. You may view this service information at the FAA, Transport Standards Branch, 2200 South 216th St., Des Moines, WA. For information on the availability of this material at the FAA, call 206–231–3195. Issued in Des Moines, Washington, on June 24, 2019. Dionne Palermo, Acting Director, System Oversight Division, Aircraft Certification Service. [FR Doc. 2019–14048 Filed 7–2–19; 8:45 am] BILLING CODE 4910–13–P 31777 maintained pursuant to section 413(c) of the Internal Revenue Code (Code), are often referred to as multiple employer plans or MEPs. The proposed regulations would provide an exception, if certain requirements are met, to the application of the ‘‘unified plan rule’’ for a defined contribution MEP in the event of a failure by an employer participating in the plan to satisfy a qualification requirement or to provide information needed to determine compliance with a qualification requirement. These proposed regulations would affect MEPs, participants in MEPs (and their beneficiaries), employers participating in MEPs, and MEP plan administrators. Comments and requests for a public hearing must be received by October 1, 2019. DATES: Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG–121508–18) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment received to its public docket, whether submitted electronically or in hard copy. Send hard copy submissions to: CC:PA:LPD:PR (REG–121508–18), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–121508– 18), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224. ADDRESSES: FOR FURTHER INFORMATION CONTACT: DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG–121508–18] RIN 1545–BO97 SUPPLEMENTARY INFORMATION: Multiple Employer Plans Background Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. AGENCY: This document sets forth proposed regulations relating to the tax qualification of plans maintained by more than one employer. These plans, SUMMARY: PO 00000 Frm 00032 Fmt 4702 Concerning the regulations, Pamela Kinard at (202) 317–6000 or Jamie Dvoretzky at (202) 317–4102; concerning submission of comments or to request a public hearing, email or call Regina Johnson at notice.comments@ irscounsel.treas.gov, (202) 317–5190, or (202) 317–6901 (not toll-free numbers). Sfmt 4702 This document sets forth proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 413(c) of the Internal Revenue Code (Code). Section 413(c) provides rules for the qualification of a plan maintained by more than one E:\FR\FM\03JYP1.SGM 03JYP1 31778 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules jspears on DSK30JT082PROD with PROPOSALS employer.1 A section 413(c) plan is often referred to as a multiple employer plan (MEP). Final regulations under section 413 were published in the Federal Register on November 9, 1979, 44 FR 65061 (the final section 413 regulations). The final section 413 regulations apply to multiple employer plans described in section 413(c) and to collectively bargained plans described in section 413(b) (plans that are maintained pursuant to certain collective-bargaining agreements between employee representatives and one or more employers). Pursuant to section 413(c) and the final section 413 regulations, all of the employers maintaining a MEP (participating employers) are treated as a single employer for purposes of certain section 401(a) qualification requirements. For example: • Under section 413(c)(1) and § 1.413–2(b), the rules for participation under section 410(a) and the regulations thereunder are applied as if all employees of each of the employers who maintain the plan are employed by a single employer; • Under section 413(c)(2) and § 1.413–2(c), in determining whether a MEP is, with respect to each participating employer, for the exclusive benefit of its employees (and their beneficiaries), all of the employees participating in the plan are treated as employees of each such employer; and • Under section 413(c)(3) and § 1.413–2(d), the minimum vesting standards under section 411 are applied as if all employers who maintain the plan constitute a single employer. Other rules are applied separately to each participating employer.2 For 1 Section 210 of the Employee Retirement Income Security Act of 1974, Public Law 93–406 (88 Stat. 829 (1974)), as amended (ERISA), also provides rules relating to plans maintained by more than one employer. Similar to section 413(c) of the Code, section 210(a) of ERISA states that the minimum participation standards, minimum vesting standards, and benefit accrual requirements under sections 202, 203, and 204 of ERISA, respectively, shall be applied as if all employees of each of the employers were employed by a single employer. Under section 101 of Reorganization Plan No. 4 of 1978 (43 FR 47713), the Secretary of the Treasury has interpretive jurisdiction over section 413 of the Code, as well as ERISA section 210. 2 Proposed rules at § 1.413–2(e) and (f) (47 FR 54093) were issued in 1982. Proposed § 1.413–2(e) would have provided that the minimum funding standard for a MEP is determined as if all participants in the plan were employed by a single employer, and proposed § 1.413–2(f) would have provided rules relating to liability for the excise tax on a failure to meet the minimum funding standards. Because these rules were proposed in 1982, they do not reflect 1988 changes to section 413(c)(4) that were made by section 6058(a) of the Technical and Miscellaneous Revenue Act of 1988, Public Law 100–647 (102 Stat. 3342) (TAMRA). As VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 example, under § 1.413–2(a)(3)(ii), the minimum coverage requirements of section 410(b) generally are applied to a MEP on an employer-by-employer basis. A plan is not described in section 413(c) unless it is maintained by more than one employer 3 and is a single plan under section 414(l).4 See §§ 1.413– 2(a)(2)(i) and 1.413–1(a)(2). Under § 1.414(l)–1(b), a plan is a single plan if and only if, on an ongoing basis, all of the plan assets are available to pay benefits to employees who are covered by the plan and their beneficiaries. Under § 1.413–2(a)(3)(iv) (sometimes referred to as the ‘‘unified plan rule’’), the qualification of a MEP is determined with respect to all employers amended by TAMRA, section 413(c)(4) generally provides that in the case of a plan established after December 31, 1988, and in the case of a plan established before that date for which an election was made, each employer is treated as maintaining a separate plan for purposes of the minimum funding standards. The proposed rules at § 1.413– 2(e) and (f) are outside the scope of these proposed regulations. Therefore, paragraphs (e) and (f) are ‘‘Reserved’’ for future rulemaking. The Treasury Department and the IRS note that taxpayers must take into account the statutory changes made after the issuance of the proposed regulations as of the effective dates of the relevant legislation. 3 Section 1.413–2(a)(2), issued in 1979, provides that for purposes of determining the number of employers maintaining a plan, any employers described in section 414(b) that are members of a controlled group of corporations or any employers described in section 414(c) that are trades or businesses under common control, whichever is applicable, are treated as if those employers are a single employer. Because § 1.413–2(a)(2) was issued in 1979, it does not address section 414(m), which was added in 1980 by section 201(a) of the Miscellaneous Revenue Act of 1980, Public Law 96–605 (94 Stat. 3521). Section 414(m) provides that all employers in an affiliated service group shall be treated as a single employer. Although amendments to § 1.413–2(a)(2) are outside the scope of these proposed regulations, the Treasury Department and the IRS note that taxpayers must take into account the statutory changes made after the issuance of the proposed regulations as of the effective dates of the relevant legislation. 4 On October 23, 2018 proposed Department of Labor regulations were published in the Federal Register (83 FR 53534) clarifying the circumstances in which employer groups or associations and professional employer organizations can constitute ‘‘employers’’ within the meaning of section 3(5) of ERISA for purposes of establishing or maintaining an individual account ‘‘employee pension benefit plan’’ within the meaning of ERISA section 3(2). Those proposed regulations state that an ‘‘employee pension benefit plan’’ under section 3(2) of ERISA must be established by an ‘‘employer,’’ defined in section 3(5) of ERISA to include an ‘‘entity acting indirectly in the interest of an employer in relation to an employee benefit plan.’’ The proposed Department of Labor regulations define the terms ‘‘bona fide group or association of employers’’ and ‘‘bona fide professional employer organization’’ and state that, with respect to a ‘‘multiple employer defined contribution pension plan,’’ these entities ‘‘shall be deemed to be able to act in the interest of an employer’’ provided that certain conditions are met. See proposed rules at 29 CFR 2510.3–55(a). The proposed Department of Labor regulations solicit comments on, but do not address, other types of entities that may be an employer under ERISA section 3(5). PO 00000 Frm 00033 Fmt 4702 Sfmt 4702 maintaining the MEP. Consequently, § 1.413–2(a)(3)(iv) provides 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 MEP for all employers maintaining the plan.’’ Section 1.416–1, Q&A G–2, includes a similar rule relating to the qualification of a MEP, providing that a failure by a MEP to satisfy section 416 with respect to employees of one participating employer means that all participating employers in the MEP are maintaining a plan that is not a qualified plan.5 Section 1101(a) of the Pension Protection Act of 2006 (PPA ’06), Public Law 109–280 (120 Stat. 780 (2006)), provides that the Secretary has full authority to establish and implement EPCRS 6 (or any successor program) and any other employee plans correction policies, including the authority to waive income, excise, or other taxes to ensure that any tax, penalty, or sanction is not excessive and bears a reasonable relationship to the nature, extent, and severity of the failure. Section 1101(b) of PPA ’06 provides that the Secretary shall continue to update and improve EPCRS (or any successor program), giving special attention to a number of items, including special concerns and circumstances that small employers face with respect to compliance and correction of compliance failures. EPCRS has been updated and expanded several times, most recently in Rev. Proc. 2019–19, 2019–19 I.R.B. 1086. In addition, as provided for in Section 1101 of PPA ’06, the Treasury Department and the IRS are authorized to establish and implement other employee plans correction policies, outside of EPCRS. On August 31, 2018, President Trump issued Executive Order 13847 (83 FR 5 This rule is based on the unified plan rule in § 1.413–2(a)(3)(iv). Therefore, if a defined contribution MEP has an unresponsive employer that fails to satisfy section 416 and the defined contribution MEP meets the conditions for the exception to the unified plan rule in these proposed regulations, the defined contribution MEP will not be disqualified for the section 416 failure. For further information, see the discussion in part II of the Explanation of Provisions section entitled Conditions for Application of Exception to the Unified Plan Rule. The rules in § 1.416–1 are outside the scope of these proposed regulations, but the Treasury Department and the IRS intend to address the topic in a broader guidance project updating the regulations under section 416. 6 The Employee Plans Compliance Resolution System (EPCRS) is a comprehensive system of correction programs for sponsors of certain retirement plans, including plans that are intended to satisfy the qualification requirements of section 401(a). EPCRS provides procedures for an employer to correct a plan’s failure to satisfy an applicable qualification requirement so that the failure does not result in disqualification of the plan. E:\FR\FM\03JYP1.SGM 03JYP1 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules jspears on DSK30JT082PROD with PROPOSALS 45321 (Sept. 6, 2018)), titled ‘‘Strengthening Retirement Security in America’’ (Executive Order). The Executive Order states that it shall be the policy of the Federal Government to expand access to workplace retirement plans for American workers and that enhancing workplace retirement plan coverage is critical to ensuring that American workers will be financially prepared to retire. The Executive Order also states that, ‘‘[e]xpanding access to [MEPs], under which employees of different private-sector employers may participate in a single retirement plan, is an efficient way to reduce administrative costs of retirement plan establishment and maintenance and would encourage more plan formation and broader availability of workplace retirement plans, especially among small employers.’’ 7 The Executive Order directs the Secretary of the Treasury to ‘‘consider proposing amendments to regulations or other guidance, consistent with applicable law and the policy set forth in . . . this order, regarding the circumstances under which a MEP may satisfy the tax qualification requirements . . . , including the consequences if one or more employers that sponsored or adopted the plan fails to take one or more actions necessary to meet those requirements.’’ 8 The Executive Order further directs the Secretary of the Treasury to consult with the Secretary of Labor in advance of issuing any such proposed guidance, and the Secretary of Labor to take steps to facilitate the implementation of any guidance, as appropriate and consistent with applicable law. Stakeholders have expressed concerns about the risk that the actions of one or more participating employers might disqualify a MEP 9 and that some employers are reluctant to join MEPs without an exception to the unified plan rule. In particular, they have said that the cooperation of participating employers is needed for compliance and when a participating employer refuses to take the steps needed to maintain qualification, the entire plan is at risk of being disqualified. Stakeholders assert that without an exception to the unified plan rule, many employers perceive that the benefits of joining a MEP are outweighed by the risk of plan 7 Id. at 45321. at 45322. 9 See also, U.S. Gov’t Accountability Office, GAO–12–665, ‘‘Federal Agencies Should Collect Data and Coordinate Oversight of Multiple Employer Plans’’ (September 2012) (https:// www.gao.gov/assets/650/648285.pdf) (identifying the unified plan rule as a potential problem for MEPs). 8 Id. VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 disqualification based on the actions of an uncooperative participating employer. Explanation of Provisions I. Overview In accordance with the Executive Order and the policy of expanding workplace retirement plan coverage, these proposed regulations, which were developed in consultation with the Secretary of Labor, would provide an exception to the unified plan rule for certain defined contribution MEPs. Under the proposed regulations, a defined contribution MEP would be eligible for the exception to the unified plan rule on account of certain qualification failures due to actions or inaction by a participating employer, if the conditions set forth in the proposed regulations are satisfied. The exception generally would be available if the participating employer in a MEP is responsible for a qualification failure that the employer is unable or unwilling to correct. It would also be available if the participating employer fails to comply with the section 413(c) plan administrator’s request for information about a qualification failure that the section 413(c) plan administrator reasonably believes might exist. For the exception to the unified plan rule to apply, certain actions are required to be taken, including, in certain circumstances, a spinoff of the assets and account balances attributable to participants who are employees of such an employer to a separate plan and a termination of that plan. For purposes of applying the exception to the unified plan rule, under the proposed regulations: (1) A section 413(c) plan administrator is defined as the plan administrator of a MEP, determined under the rules of section 414(g); (2) a participating employer is defined as one of the employers maintaining a MEP; (3) an unresponsive participating employer is defined as a participating employer in a MEP that fails to comply with reasonable and timely requests from the section 413(c) plan administrator for information necessary 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; and (4) an employee is defined as a current or former employee of a participating employer. PO 00000 Frm 00034 Fmt 4702 Sfmt 4702 31779 The exception to the unified plan rule would apply only in the case of certain types of failures to satisfy the qualification requirements, referred to in the proposed regulations as participating employer failures. A participating employer failure is defined as either a known qualification failure or a potential qualification failure. A known qualification failure is defined as a failure to satisfy a qualification requirement with respect to a MEP that is identified by the section 413(c) plan administrator and is attributable solely to an unresponsive participating employer. A potential qualification failure is a failure to satisfy a qualification requirement with respect to a MEP that the section 413(c) plan administrator reasonably believes might exist, but the section 413(c) plan administrator is unable to determine whether the qualification requirement is satisfied solely due to an unresponsive participating employer’s failure to provide data, documents, or any other information necessary to determine whether the MEP is in compliance with the qualification requirement as it relates to the participating employer. For purposes of the definitions of known qualification failure and potential qualification failure, an unresponsive participating employer includes any employer that is treated as a single employer with that unresponsive participating employer under section 414(b), (c), (m), or (o). II. Conditions for Application of Exception to Unified Plan Rule Under the exception to the unified plan rule in the proposed regulations, a defined contribution MEP would not be disqualified on account of a participating employer failure, provided that the following conditions are satisfied: (1) The MEP satisfies certain eligibility requirements (such as a requirement to have established practices and procedures to promote compliance and a requirement to adopt relevant plan language); (2) the section 413(c) plan administrator provides notice and an opportunity for the unresponsive participating employer to take remedial action with respect to the participating employer failure; (3) if the unresponsive participating employer fails to take appropriate remedial action with respect to the participating employer failure, the section 413(c) plan administrator implements a spinoff; and (4) the section 413(c) plan administrator complies with any information request that the IRS or a representative of the spun-off plan makes in connection with an IRS examination of the spun-off plan, including any information request E:\FR\FM\03JYP1.SGM 03JYP1 31780 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules related to the participation of the unresponsive participating employer in the MEP for years prior to the spinoff. A spinoff may either be a spinoff that is initiated by the unresponsive participating employer and implemented by the section 413(c) plan administrator, or a spinoff-termination implemented by the section 413(c) plan administrator pursuant to plan terms. jspears on DSK30JT082PROD with PROPOSALS A. MEP’s Eligibility for Exception to the Unified Plan Rule under special rules. Under these special rules, for example, a plan is under an Employee Plans examination if the section 413(c) plan administrator, or an authorized representative, has received verbal or written notification of an impending Employee Plans examination, or of an impending referral for an Employee Plans examination, or if a plan has been under an Employee Plans examination and the plan has an appeal pending with the IRS Office of Appeals (or its successor), or is in litigation with the IRS, regarding issues raised in the Employee Plans examination. This definition of the term under examination is similar to the definition in EPCRS. See Rev. Proc. 2019–19, section 5.08. However, unlike in EPCRS, a plan is not under examination for purposes of these proposed regulations merely because it is maintained by an employer that is under an Exempt Organizations examination (that is, an examination of a Form 990 series or other examination by the Exempt Organizations Office of the Tax Exempt and Government Entities Division of the IRS). Under the proposed regulations, a threshold condition for the exception to the unified plan rule is that the MEP meet certain eligibility requirements. Specifically, the proposed regulations would require the section 413(c) plan administrator to have established practices and procedures (formal or informal) that are reasonably designed to promote and facilitate overall compliance with applicable Code requirements, including procedures for obtaining information from participating employers. In addition, the plan document would need to include language describing the procedures that would be followed to address participating employer failures, including the procedures that the section 413(c) plan administrator would follow if, after receiving notice from the section 413(c) plan administrator, an unresponsive participating employer fails to take appropriate remedial action or to initiate a spinoff from the MEP pursuant to the regulations.10 Finally, a MEP is not eligible for the exception to the unified plan rule if, as of the date that the first notice is provided to an unresponsive participating employer, the MEP is under examination. For a description of the first notice, see part II.B. of this Explanation of Provisions section, entitled Notice Requirements. For purposes of the proposed regulations, a plan is under examination if: (1) The plan is under an Employee Plans examination (that is, an examination of a Form 5500 series, ‘‘Annual Return/Report of Employee Benefit Plan,’’ or other examination by the Employee Plans Office of the Tax Exempt and Government Entities Division of the IRS (Employee Plans) (or any successor IRS office that has jurisdiction over qualified retirement plans)); (2) the plan is under investigation by the Criminal Investigation Division of the IRS (or its successor); or (3) the plan is treated as under an Employee Plans examination B. Notice Requirements The proposed regulations would require the section 413(c) plan administrator to provide up to three notices regarding a participating employer failure to the unresponsive participating employer; with the third notice, if applicable, also being provided to participants and beneficiaries and the Department of Labor.11 The first notice must describe the participating employer failure (or failures), as well as the remedial actions the unresponsive participating employer would need to take to remedy the failure and the employer’s option to initiate a spinoff. The first notice must also explain the consequences under plan terms if the unresponsive participating employer neither takes appropriate remedial action with respect to the participating employer failure nor initiates a spinoff, including the possibility that a spinoff of the plan assets and account balances attributable to the employees of that employer into a separate single-employer plan would occur, followed by a termination of that plan (as discussed in this preamble under the heading SpinoffTermination). If, by the end of the 90-day period following the date the first notice is 10 Once final regulations are issued, the Treasury Department and the IRS intend to publish guidance in the Internal Revenue Bulletin setting forth model language that may be used for this purpose. 11 If the notices relate to a potential qualification failure, and the potential qualification failure becomes a known qualification failure, then a new series of notices may be required. VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 PO 00000 Frm 00035 Fmt 4702 Sfmt 4702 provided, the unresponsive participating employer neither takes appropriate remedial action nor initiates a spinoff, then no later than 30 days after the expiration of that 90-day period, the section 413(c) plan administrator must provide a second notice to that employer. The second notice must include the information required to be included in the first notice, and must also inform the employer that if it fails either to take appropriate remedial action or to initiate a spinoff within 90 days after the second notice then a notice describing the participating employer failure and the consequences of not correcting that failure will be provided to participants who are employees of the unresponsive participating employer (and their beneficiaries) and to the Department of Labor. If, by the end of the 90-day period following the date the second notice is provided, the unresponsive participating employer neither takes appropriate remedial action nor initiates a spinoff, then no later than 30 days after the expiration of that 90-day period, the section 413(c) plan administrator must provide a third notice to the unresponsive participating employer, to participants who are employees of that employer (and their beneficiaries), and to the Department of Labor.12 The third notice must include the information required to be included in the first notice, the deadline for employer action, and an explanation of any adverse consequences to participants in the event that a spinofftermination occurs, and state that the notice is being provided to participants who are employees of the unresponsive participating employer (and their beneficiaries) and to the Department of Labor. C. Actions by Unresponsive Participating Employer The proposed regulations provide that after the unresponsive participating employer has received notice of the participating employer failure, the employer has the opportunity to either take appropriate remedial action or initiate a spinoff. The final deadline for an unresponsive participating employer to take one of these actions is 90 days after the third notice is provided. The consequences of the employer’s failure to meet this deadline are described in this Explanation of Provisions section 12 The notice to the Department of Labor should be mailed to the Employee Benefits Security Administration’s Office of Enforcement (or its successor office). The Office of Enforcement is currently located at 200 Constitution Ave. NW, Suite 600, Washington, DC 20210. E:\FR\FM\03JYP1.SGM 03JYP1 jspears on DSK30JT082PROD with PROPOSALS Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules under part II.E., entitled SpinoffTermination. The proposed regulations provide that an unresponsive participating employer takes appropriate remedial action with respect to a potential qualification failure if the employer provides data, documents, or any other information necessary for the section 413(c) plan administrator to determine whether a qualification failure exists. If (1) the unresponsive participating employer provides this information, (2) the section 413(c) plan administrator determines that, based on this information, a qualification failure exists that is attributable solely to that employer, and (3) the participating employer fails to comply with reasonable and timely requests from the section 413(c) plan administrator to take actions that are needed to correct that qualification failure, then the qualification failure becomes a known qualification failure. In that case, the MEP would be eligible for the exception to the unified plan rule with respect to the known qualification failure by satisfying the conditions with respect to that known qualification failure, taking into account the rules described in this Explanation of Provisions section under part II.D., entitled Actions by Section 413(c) Plan Administrator Relating to Remedial Action or Employer-Initiated Spinoff. An unresponsive participating employer takes appropriate remedial action with respect to a known qualification failure if the employer takes action, such as making corrective contributions, that corrects, or enables the section 413(c) plan administrator to correct, the known qualification failure. As an alternative to taking appropriate remedial action with respect to a potential or a known qualification failure, an unresponsive participating employer may, after receiving notice of the participating employer failure, initiate a spinoff by directing the section 413(c) plan administrator to spin off plan assets and account balances held on behalf of employees of that employer to a separate single-employer plan established and maintained by that employer in a manner consistent with plan terms. In that case, the section 413(c) plan administrator must implement that spinoff, as described in this Explanation of Provisions section under part II.D., entitled Actions by Section 413(c) Plan Administrator Relating to Remedial Action or Employer-Initiated Spinoff. VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 D. Actions by Section 413(c) Plan Administrator Relating to Remedial Action or Employer-Initiated Spinoff For purposes of applying the conditions of the exception to the unified plan rule to a potential qualification failure that becomes a known qualification failure, actions taken (including notices provided) when the failure was a potential qualification failure are not taken into account. For example, a notice that the section 413(c) plan administrator provided in connection with the potential qualification failure would not satisfy the notice requirements for the known qualification failure. However, in determining whether the MEP is under examination as of the date of the first notice describing the known qualification failure, the section 413(c) plan administrator will be treated as providing that notice on the date the first notice was provided with respect to the related potential qualification failure, but only if the following conditions are satisfied: (1) After determining that a qualification failure exists, the section 413(c) plan administrator makes a reasonable and timely request to the participating employer to take actions that are needed to correct the failure, and (2) as soon as reasonably practicable after the participating employer fails to respond to that request, the section 413(c) plan administrator provides the first notice with respect to the known qualification failure. The Treasury Department and the IRS anticipate revising EPCRS to provide that, if a 413(c) plan administrator provides the first notice with respect to a participating employer failure under a MEP at a time that the plan is not under examination, then the MEP will not be considered to be under examination for purposes of determining whether the participating employer failure is eligible to be corrected under the Self Correction Program or Voluntary Correction Program components of EPCRS. It is anticipated that this application of the term under examination under EPCRS will be conditioned on the 413(c) plan administrator complying with applicable conditions for the exception to the unified plan rule and, for a known qualification failure with respect to which the unresponsive participating employer takes appropriate remedial action, taking any remaining action necessary to correct the qualification failure as soon as reasonably practicable. If an unresponsive participating employer takes appropriate remedial action with respect to a known PO 00000 Frm 00036 Fmt 4702 Sfmt 4702 31781 qualification failure, then the section 413(c) plan administrator must take any remaining action necessary to correct the qualification failure. If the section 413(c) plan administrator fails to take any remaining action necessary to correct the known qualification failure, the exception to the unified plan rule will not apply and the section 413(c) plan may be disqualified on account of that failure. If, instead of taking appropriate remedial action (as described in part II.C. of this Explanation of Provisions, entitled Actions by Unresponsive Participating Employer), an unresponsive participating employer initiates a spinoff of plan assets and account balances held on behalf of employees of that employer to a separate single-employer plan established and maintained by that employer, the section 413(c) plan administrator must implement and complete a spinoff of the plan assets and account balances held on behalf of the employees of the employer that are attributable to employment by the employer within 180 days of the date on which it was initiated. The section 413(c) plan administrator must also report the spinoff to the IRS (in the manner prescribed by the IRS in forms, instructions, and other guidance). E. Spinoff-Termination If, after the first notice of a participating employer failure is provided, the unresponsive participating employer neither takes appropriate remedial action nor initiates a spinoff by the date that is 90 days after the third notice is provided, then, for the exception to the unified plan rule to apply, there must be a spinoff of the plan assets and account balances held on behalf of employees of the unresponsive participating employer that are attributable to their employment with that employer to a separate plan, followed by a termination of that plan. The spinoff-termination must be pursuant to plan terms and in accordance with the proposed regulations. The MEP will satisfy this condition, if, as soon as reasonably practicable after the deadline for action by the unresponsive participating employer, the section 413(c) plan administrator: (1) Provides notice of the spinoff-termination to participants who are employees of the unresponsive participating employer (and their beneficiaries); (2) stops accepting contributions from the unresponsive participating employer; (3) implements a spinoff, in accordance with the transfer requirements of section 414(l) and the anti-cutback requirements of E:\FR\FM\03JYP1.SGM 03JYP1 31782 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules jspears on DSK30JT082PROD with PROPOSALS section 411(d)(6), of the plan assets and account balances held on behalf of employees of the unresponsive participating employer that are attributable to their employment by that employer to a separate single-employer plan and trust that has the same plan administrator, trustee, and substantive plan terms as the MEP; and (4) terminates the spun-off plan and distributes assets of the spun-off plan to plan participants and beneficiaries as soon as reasonably practicable after the plan termination date.13 In terminating the spun-off plan, the section 413(c) plan administrator must: • Reasonably determine whether, and to what extent, the survivor annuity requirements of sections 401(a)(11) and 417 apply to any benefit payable under the plan and take reasonable steps to comply with those requirements (if applicable); • Provide each participant and beneficiary with a nonforfeitable right to his or her accrued benefits as of the date of plan termination, subject to income, expenses, gains, and losses between that date and the date of distribution; and • Notify the participants and beneficiaries of their rights under section 402(f). In providing notice of the spinofftermination to participants (and their beneficiaries), the section 413(c) plan administrator must provide information relating to the spinoff-termination to participants who are employees of the unresponsive participating employer (and their beneficiaries), including the following: (1) Identification of the MEP and contact information for the section 413(c) plan administrator; (2) the effective date of the spinoff-termination; (3) a statement that no more contributions will be made to the MEP; (4) a statement that as soon as practicable after the spinoff-termination, participants and beneficiaries will receive a distribution from the spun-off plan; and (5) a statement that before the distribution occurs, participants and beneficiaries will receive additional information about their options with respect to that distribution. The section 413(c) plan administrator must report the spinoff-termination to 13 The Pension Benefit Guaranty Corporation’s Missing Participants Program provides a mechanism for distributing assets to plan participants in a terminating plan. See 29 CFR 4050.201 through 4050.207. Use of the Pension Benefit Guaranty Corporation’s Missing Participants Program is optional for defined contribution plans. Under the program, the Pension Benefit Guaranty Corporation locates participants and beneficiaries who were missing when their plans terminated. When found, depending on arrangements made by the plan, the Pension Benefit Guaranty Corporation either provides the benefit or information about where the participant’s account is being held. VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 the IRS (in the manner prescribed by the IRS in forms, instructions, and other guidance). III. Other Rules A. Form of Notices Any notices required to be provided under the proposed regulations may be provided in writing or in electronic form. For notices provided to participants and beneficiaries, see generally § 1.401(a)–21 for rules permitting the use of electronic media to provide applicable notices to recipients with respect to retirement plans. B. Qualification of Spun-Off Plan In the case of any plan that is spun off in accordance with the proposed regulations, any participating employer failure that would have affected the qualification of a MEP, but for the application of the exception to the unified plan rule, will be a qualification failure with respect to the spun-off plan. In the case of an employer-initiated spinoff, see EPCRS (or its successors) for rules relating to correcting qualification failures. Under the authority provided by section 1101 of PPA ’06, the proposed regulations provide that distributions made from a spun-off plan that is terminated in accordance with these regulations would not, solely because of the participating employer failure, fail to be eligible for favorable tax treatment accorded to distributions from qualified plans (including that the distributions will be treated as eligible rollover distributions under section 402(c)(4)), except as provided in the next paragraph. Under section 1101 of PPA ’06, Congress gave the Secretary broad authority to establish employee plans correction policies. In developing a correction policy for MEPs, it is appropriate to treat distributions to rank-and-file participants following a spinoff-termination as eligible for taxfavored treatment in order to ensure that the tax or sanction is not excessive and bears a reasonable relationship to the nature of the failure.14 The regulations also provide that, notwithstanding the general rule regarding favorable tax treatment for distributions from a plan following spinoff-termination, the IRS reserves the right to pursue appropriate remedies under the Code against any party (such as the owner of the participating 14 In addition, a participating employer failure could either be a known qualification failure or a potential qualification failure. Treating distributions from a spun-off and terminated plan relating to a potential qualification failure as ineligible for tax-favored treatment does not bear a reasonable relationship to the nature of the failure. PO 00000 Frm 00037 Fmt 4702 Sfmt 4702 employer) who is responsible for the participating employer failure resulting in the spinoff-termination. The IRS may pursue appropriate remedies against a responsible party even in the party’s capacity as a participant or beneficiary under the plan that is spun off and terminated (such as by not treating a plan distribution made to the responsible party as an eligible rollover distribution). This is similar to the approach adopted in EPCRS with respect to terminating orphan plans. See Rev. Proc. 2019–19, section 6.02(2)(e)(i). The proposed regulations also provide that the Commissioner may provide additional guidance, such as in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin, or in forms and instructions, that the Commissioner determines to be necessary or appropriate with respect to the requirements of the regulations. Proposed Applicability Date These regulations generally are proposed to apply on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. Until regulations finalizing these proposed regulations are issued, taxpayers may not rely on the rules set forth in these proposed regulations. Availability of IRS Documents For copies of recently issued revenue procedures, revenue rulings, notices and other guidance published in the Internal Revenue Bulletin, please visit the IRS website at www.irs.gov or contact the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Special Analyses I. Regulatory Impact Analysis Executive Orders 13771, 13563, and 12866 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits, including potential economic, environmental, public health and safety effects, distributive impacts, and equity. Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. The Executive Order 13771 designation for any final rule resulting from the proposed regulation will be informed by comments received. The preliminary Executive Order 13771 designation for this proposed rule is deregulatory. The proposed regulation has been designated by the Office of Information E:\FR\FM\03JYP1.SGM 03JYP1 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules and Regulatory Affairs (OIRA) as significant under Executive Order 12866 pursuant to the Memorandum of Agreement (MOA, April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. jspears on DSK30JT082PROD with PROPOSALS 1. Introduction and Need for Regulation The U.S. retirement system is comprised of three main pillars of savings: Social Security, workplace pension plans, and individual savings. Yet, roughly 30% of American workers lack access to an employer-sponsored savings vehicle (See Table 1 in Section 7 of this Regulatory Impact Analysis, entitled Tables). 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. This would lead to larger firms enjoying a competitive advantage in labor markets. One factor that may prevent small firms from offering a plan includes the high administrative costs associated with compliance. In order to receive preferential tax treatment, a plan must meet certain criteria specified in the Code and ensuring that those requirements are met can be costly. Furthermore, the costs associated with managing funds in retirement plans tends to be higher for a smaller pool of assets (See Table 3 in Section 7, later), which is more likely to be the case for smaller firms with fewer employees. One solution that has developed for reducing these administrative and asset management costs is the MEP, through which different employers can form a single plan to take advantage of economies of scale. Under the current regulations under section 413(c), however, the unified plan rule creates a situation whereby should one employer fail to comply with the qualification requirements, then the preferential tax status for a qualified plan is lost for the entire MEP. The proposed regulation provides an exception to the unified plan rule for certain defined contribution MEPs, permitting compliant participating employers to continue to maintain a qualified plan if certain conditions are satisfied. Reducing the perceived risk that a MEP will be disqualified could lead to more small employers to adopt these plans. 2. Affected Entities Based on the latest available data, as shown in Table 2, there are about 4,630 defined contribution MEPs with approximately 4.4 million total participants, 3.7 million of whom are active participants. Defined contribution MEPs hold about $181 billion in assets. VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 Fifty-six percent of defined contribution MEP participants are in MEPs with 10,000 or more participants, and 98% are in MEPs with 100 or more participants. As noted earlier, about 30% of employees do not have access to a retirement savings plan through their employer. The proposed regulation, which is limited to defined contribution MEPs, may encourage both the creation of new defined contribution MEPs and the expansion of existing defined contribution MEPs. As a result of the proposed regulation, the cost of providing some existing employersponsored retirement plans could fall, and some employees would gain access to employer-sponsored retirement plans. 3. Baseline The analysis in this section compares the proposed regulation to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these proposed regulations. 4. Benefits a. Expanded Access to Coverage Generally, employees rarely choose to save for retirement outside of the workplace, despite having options to save in tax-favored savings vehicles on their own; only about 10% of households without access to an employer-sponsored plan made contributions to traditional or Roth IRAs for 2014.15 Thus, the availability of workplace retirement plans is a significant factor affecting whether individuals save for their retirement. Yet, despite the advantages of workplace retirements plans, access to such plans for employees of small businesses is relatively low. The MEP structure may address significant concerns from employers about the costs to set up and administer retirement benefit plans. In order to participate in a MEP, employers would simply execute a participation agreement or similar instrument setting forth the rights and obligations of the MEP and participating employers. Each participating employer would then be participating in a single plan, rather than sponsoring its own separate plan. The individual employers would not be directly responsible for the MEP’s overall compliance with reporting and disclosure obligations. Accordingly, the MEP structure may address small employers’ concerns regarding the cost associated with fiduciary liability of sponsoring a retirement plan by effectively transferring much of the legal risks and responsibilities to professional 15 Based on tabulations from the Office of Tax Analysis’ microsimulation model. PO 00000 Frm 00038 Fmt 4702 Sfmt 4702 31783 fiduciaries who would be responsible for managing plan assets and selecting investment menu options, among other things. Participating employers’ continuing involvement in the day-today operations and administration of their MEP generally would be limited to enrolling employees and forwarding employee and employer contributions to the plan. Thus, participating employers would keep more of their day-to-day focus on managing their businesses, rather than their retirement plans. The proposed regulation would reduce the risk to small businesses participating in a MEP. Currently, if one participating employer fails to meet the qualification requirements in the Code for preferential tax treatment, then the entire plan may be disqualified, and employers participating in a MEP and their employees would lose the tax benefits of participating in a qualified retirement plan (deduction for contributions, exclusion of investment returns, deferred income recognition for employees). As a result, the current rule imposes an undue burden on employers who satisfied their requirements but happened to have a bad actor among their plan’s other employers. The proposed regulation minimizes this burden by allowing noncompliant or unresponsive participating employers to be dealt with separately while the other participating employers maintain a qualified plan. Thus, the risk taken on by any one participating employer when joining a MEP is reduced as the employer no longer needs to consider the actions of other participating employers over which the employer exerts no control. The proposed regulation may therefore encourage formation of additional MEPs, as well as expanded participation in existing MEPs. Because more plan formation and broader availability of such plans is likely to occur due to the proposed regulations, especially among small employers, the Treasury Department has determined that the proposed regulation would increase access to retirement plans for many American workers. However, the Treasury Department does not have sufficient data to determine precisely the likely extent of increased participation by small employers under the proposed regulation. b. Reduced Fees and Administration Savings Most MEPs could be expected to benefit from scale advantages that small businesses do not currently enjoy and to pass on some of the savings to participating employers and employees. Grouping small employers together into E:\FR\FM\03JYP1.SGM 03JYP1 jspears on DSK30JT082PROD with PROPOSALS 31784 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules a MEP may facilitate savings through administrative efficiencies (economies of scale) and potentially through price negotiation (market power). As scale increases, MEPs would spread fixed costs over a larger pool of participating employers and employee participants. Scale efficiencies can be very large with respect to asset management and may be smaller, but still meaningful, with respect to recordkeeping. Also, as scale increases, so does the negotiating power of MEPs. Negotiating power matters when competition among financial services providers is less than perfect, and they can command greater profits than in an environment with perfect competition. Very large plans may exercise their own market power to negotiate lower prices, translating into savings for member employees and employee participants. Sometimes, scale efficiencies would not translate into savings for small employer members and their employee participants because regulatory requirements applicable to large MEPs may be more stringent than those applicable to most separate small plans. For example, some small plans are exempt from annual reporting requirements, and many others are subject to more streamlined reporting requirements than larger plans. But in most cases, the savings from the scale efficiency of MEPs would be greater than the savings from scale efficiencies that other providers of bundled financial services may offer to small employers. First, the legal status of MEPs as a single large plan may streamline certain regulatory burdens under the Code and title I of ERISA. For example, a MEP can file a single annual return/report and obtain a single bond in lieu of the multiple reports and bonds necessary when other providers of bundled financial services administer many separate plans. Second, relative to separate small employer plans, a MEP operating as a large single plan would likely secure substantially lower prices from financial services companies. Asset managers commonly offer proportionately lower prices, relative to assets invested, to larger investors, under so-called tiered pricing practices. For example, investment companies often offer lowerpriced mutual fund share classes to customers whose investments in a fund surpass specified break points. These lower prices may reflect scale economies in any or all aspects of administering larger accounts, such as marketing, distribution, asset management, recordkeeping, and transaction processing. MEPs that are VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 larger would likely qualify for lower pricing compared with separate plans of small employers. MEP participants that benefit from lower asset-based fees would enjoy superior investment returns net of fees. The availability and magnitude of scale efficiencies may be different with respect to different retirement plan services. For example, asset management generally enjoys very largescale efficiencies. Investors of all kinds generally benefit by investing in large co-mingled pools. Even within large pools, however, small investors often pay higher fees than larger ones. Investors with more assets to invest may pay lower costs when using mutual funds as investment vehicles. As with asset management, scale efficiencies often are available with respect to other plan services. For example, the marginal costs of services such as marketing and distribution, account administration, and transaction processing often decrease as customer size increases. Similarly, small pension plans sometimes incur high distribution costs, reflecting commissions paid to agents and brokers who sell investment products to plans. MEPs, as large customers, may enjoy scale efficiencies in the acquisition of such services. It is also possible, however, that the cost to MEPs of servicing many small employer-members may diminish or even offset such efficiencies. Stated differently, MEPs’ scale efficiencies may not always exceed the scale efficiencies from other providers of bundled financial services used by small employers that sponsor separate plans. In addition, even if MEPs are able to enjoy scale efficiencies greater than the scale efficiencies available from other providers of bundled financial services, the scale efficiencies of MEPs catering to small businesses would still likely be smaller than the scale efficiencies enjoyed by very large single-employer plans. By reducing the risk to employers of participating in a MEP, the proposed regulation would allow more MEPs to be established and to pursue scale advantages. It would also extend scale advantages to some existing MEPs that otherwise might have been too small to achieve them and to small employers that absent the proposed regulation would have offered separate plans (or no plans), but that under this proposed regulation may participate in a MEP. While MEP’s scale advantages may be smaller than the scale advantages enjoyed by very large single-employer plans, it nonetheless is illuminating to consider the savings historically enjoyed by the latter. For an illustration PO 00000 Frm 00039 Fmt 4702 Sfmt 4702 of how much investment fees vary based on the amount of assets in a 401(k) plan, see Table 3 in Section 7 of this Regulatory Impact Analysis entitled Tables. The table focuses on mutual funds, which are the most common investment vehicle in 401(k) plans, and shows that the average expense ratio is inversely related to plan size. There are some important caveats to interpreting Table 3. The first is that it does not include data for most of the smallest plans since plans with fewer than 100 participants generally are not required to submit audited financial statements with their Form 5500. The second is that there is variation across plans in whether and to what degree the cost of recordkeeping is included in the expense ratios. Another method for comparing plan size advantages is a broader measure called ‘‘total plan cost’’ calculated by BrightScope that includes fees reported on the audited Form 5500. As Table 4 shows, total plan cost yields generally similar results about the cost differences facing small and large plans. Deloitte Consulting LLP, for the Investment Company Institute, conducted a survey of 361 defined contributions plans.16 The study calculates the ‘‘all-in’’ fee that is comparable across plans, and included both administrative and investment fees paid by the plan and participants. Generally, small plans with 10 or fewer participants are paying approximately 50 basis points more than plans with more than 1,000 participants. Generally, small plans with 10 or fewer participants are paying about 90 basis points more than large plans with more than 50,000 participants. The research studies described under this heading, Reduced Fees and Administrative Costs, show that small plans and their participants generally pay higher fees than large plans and their participants. Because this rule would give many small employers the incentive to join a MEP, some of which may become very large plans, many of these employers would likely incur lower fees. Many employers that are not currently offering any retirement plan may join a MEP, leading their employees to save for retirement. Many employers already sponsoring a retirement plan might decide to join a MEP instead. If there are lower fees in the MEPs than in their previous plans, 16 Deloitte Consulting and Investment Company Institute, ‘‘Inside the Structure of Defined Contribution/401(k) Plan Fees, 2013: A Study Assessing the Mechanics of the ‘All-in’ Fee’’ (Aug. 2014) (available at https://www2.deloitte.com/ content/dam/Deloitte/us/Documents/humancapital/us-cons-401k-fee-study-2013-082014.pdf). E:\FR\FM\03JYP1.SGM 03JYP1 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules jspears on DSK30JT082PROD with PROPOSALS those lower fees would translate into higher savings. c. Reduced Reporting and Audit Costs The potential for MEPs to enjoy reporting cost savings merits separate attention because this potential is shaped not only by economic forces, but also the reporting requirements applicable to different plans. On the one hand, a MEP, as a single ERISA plan, can file a single report and conduct a single audit, while separate plans may be required to file separate reports and conduct separate audits. On the other hand, a MEP, as a large plan generally is subject to more stringent reporting and audit requirements than a small plan, which likely files no or streamlined reports and undergoes no audits. With respect to reporting and audits, MEPs may offer more savings to medium-sized employers (with 100 or more retirement plan participants) that are already subject to more stringent reporting and audit requirements than to small employers. Small employers that otherwise would have fallen outside of reporting and audit requirements sometimes would incur slightly higher costs by joining MEPs. This cost increase may still be offset by benefits described in other sections. From a broader point of view, if auditing becomes more prevalent because small employers join MEPs, that would lead to more and better quality data that would improve security for employers, participants and beneficiaries. Sponsors of ERISA-covered retirement plans generally must file a Form 5500 annually, with all required schedules and attachments. The cost burden incurred to satisfy the Form 5500 related reporting requirements varies by plan type, size and complexity. Analyzing the 2016 Form 5500 filings, the Department of Labor estimates that the average cost to file the Form 5500 is as follows: $276 per filer for small (generally less than 100 plan participants) single-employer defined contribution plans eligible for Form 5500–SF; $437 per filer for small singleemployer defined contribution plans not eligible to file Form 5500–SF; and $1,686 per filer for larger (generally 100 participants or more) single-employer defined contribution plans, plus the cost of an audit. Additional schedules and reporting may be required for large and complex plans. For example, large retirement plans are required to attach auditor’s reports to their Form 5500. Most small plans are not required to obtain or attach such reports. Hiring an auditor and obtaining an audit report can be VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 costly for plans, and audit fees may increase as plans get larger or if plans are more complex. A recent report states that the fee to audit a 401(k) plan ranges between $6,500 and $13,000.17 If an employer joins a MEP, it may save some costs associated with filing Form 5500 and fulfilling audit requirements to the extent the MEP is considered a single plan under ERISA. Thus, one Form 5500 and audit report would satisfy the reporting requirements, and each participating employer would not need to file its own, separate Form 5500 and, for large plans or those few small plans that do not meet the small plan audit waiver, an audit report. Assuming reporting costs are shared by participating employers within a MEP, an employer joining a MEP can save virtually all the reporting costs discussed above. Large plans may enjoy even higher cost savings if audit costs are taken into account. It is less clear whether the selfemployed would experience similar reporting cost savings by joining a MEP. The Department of Labor estimated these potential cost savings by comparing the reporting costs of an employer that participates in a MEP rather than sponsoring its own plan. However, several retirement savings options are already available for selfemployed persons, and most have minimal or no reporting requirements. For example, both SEP IRA and SIMPLE IRA plans are available for small employers and the self-employed and neither option requires Form 5500 filings. Solo 401(k) plans are also available for self-employed persons, and they may be exempt from the Form 5500–EZ reporting requirement if plan assets are less than $250,000. Thus, if self-employed individuals join a MEP, they would be unlikely to realize reporting cost savings. In fact, it is possible that their reporting costs may slightly increase, because the selfemployed would share reporting costs with other MEP participating employers that they would otherwise not incur.18 17 See https://www.thayerpartnersllc.com/blog/ the-hidden-costs-of-a-401k-audit. However, in a comment letter received by the Department of Labor in response to its October 23, 2018 (83 FR 53534), proposed rule clarifying the circumstances under which an employer group or association or PEO may sponsor a MEP, an association reported that the cost of its MEP audit was $24,000. See comment letter #6 Employers Association of New Jersey, EANJ at https://www.dol.gov/sites/default/files/ ebsa/laws-and-regulations/rules-and-regulations/ public-comments/1210-AB88/00006.pdf. 18 However, self-employed participants, like all participants in small plans, would benefit from these enhanced audit and reporting requirements. PO 00000 Frm 00040 Fmt 4702 Sfmt 4702 31785 d. Reduced Bonding Costs The potential for bonding cost savings in MEPs merits separate attention. As noted above, ERISA section 412 and related regulations generally require every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan to be bonded. ERISA’s bonding requirements are intended to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who handle plan funds or other property, generally referred to as plan officials. A plan official must be bonded for at least 10 percent of the amount of funds he or she handles, subject to a minimum bond amount of $1,000 per plan with respect to which the plan official has handling functions. In most instances, the maximum bond amount that can be required under ERISA with respect to any one plan official is $500,000 per plan; however, the maximum required bond amount is $1,000,000 for plan officials of plans that hold employer securities.19 Under the proposed regulation, MEPs generally might enjoy lower bonding costs than would an otherwise equivalent collection of small, separate plans, for two reasons. First, it might be less expensive to buy one bond covering a large number of individuals who handle plan funds than a large number of bonds covering the same individuals separately or in small, more numerous groups. Second, the number of people handling plan funds and therefore subject to ERISA’s bonding requirement in the context of a MEP may be smaller than in the context of an otherwise equivalent collection of smaller, separate plans. e. Increased Retirement Savings The various effects of this rule, if finalized, may lead in aggregate to increased retirement savings. As discussed above, many employees would likely go from not having any access to a retirement plan to having access through a MEP. This has the potential to result in an increase in retirement savings, on average, for this group of employees. While some employees may choose not to participate, surveys indicate that a large number would participate. For a defined contribution pension plan, about 73 percent of all employees with access 19 See DOL Field Assistance Bulletin 2008–04, https://www.dol.gov/agencies/ebsa/employers-andadvisers/guidance/field-assistance-bulletins/200804. E:\FR\FM\03JYP1.SGM 03JYP1 31786 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules While the proposed regulation effectively lowers the cost of participation in a MEP among employers, the rule may also lead to increased levels of noncompliance. For example, the section 413(c) plan administrator may become less diligent about ensuring that participating employers within a MEP are responsible employers. By potentially increasing noncompliance, the proposed regulation would impose new costs on section 413(c) plan administrators who are ultimately responsible for managing unresponsive employers. In particular, for a plan to maintain its tax-favored status, the section 413(c) plan administrator is required to send notice to an unresponsive employer giving it 90 days to remedy the situation. If the unresponsive employer fails to comply, the plan administrator must send a second notice and then a final notice if the unresponsive employer still fails to comply after specified time periods. In the event of the initiation of the spinoff process, in which assets associated with an unresponsive employer are separated into a new plan that is then terminated, additional costs from the resulting compliance measures will be incurred by the section 413(c) plan administrator, who among other things is tasked with notifying all impacted participants and beneficiaries. These additional costs may be directly passed on to unresponsive employers. However, it’s possible that section 413(c) plan administrators may spread these costs across all participating employers that would either absorb or pass those costs on to their employees. The proposed regulation may also indirectly lead to an increase in investment fees by increasing uncertainty in the size of a MEP’s asset pool. For example, a plan may shrink considerably when assets of an unresponsive participating employer are spun off depending on that employer’s share of the total asset pool. Since the cost savings in investment fees is derived from economies of scale, introducing uncertainty in plan size might induce management companies to increase prices to account for that risk. This cost would likely be spread across all employers participating in the MEP that might then pass those costs on to their employees. More general concerns pertaining to MEPs include their potential for abuse, such as fraud, mishandling of plan assets, or charging excessive fees.23 Relative to single-employer plans, MEPs may be more susceptible to abuse since coordination across participating employers may lead to confusion regarding each individual firm’s 20 U.S. Bureau of Labor Statistics, National Compensation Survey, Employee Benefits in the U.S. (March 2018). 21 Id. 22 Plan Sponsor Council of America, ‘‘61st Annual Survey of Profit Sharing and 401(k) Plans, Reflecting 2017 Plan Experience’’ (2018), Table 111. 23 (83 FR 53534) (October 23, 2018). participate in the plan.20 Among employees whose salary tends to be in the lowest 10 percent of the salary range, this figure is about 40 percent.21 One reason that these take-up rates are relatively high is that many plans use automatic enrollment to enroll newly hired employees, as well as, sometimes existing employees. Automatic enrollment is particularly prevalent among large plans; in 2017 about 74 percent of plans with 1,000–4,999 participants used automatic enrollment, while only about 27 percent of plans with 1–49 participants did.22 Some workers may be saving in an IRA, either in an employer-sponsored IRA, payroll deduction IRA, or on their own. If they begin participating in a MEP 401(k), they would have the opportunity to take advantage of higher contribution limits, and some individuals may begin receiving employer contributions when participating in a MEP when they did not previously. In general, MEPs may offer participants a way to save for retirement with lower overall costs. In particular, the fees are likely to be lower than in most small plans and in retail IRAs. The savings in fees would result in higher investment returns and thus higher retirement savings. f. Increased Labor Market Efficiency The increased prevalence of MEPs would allow small employers the opportunity to offer retirement benefits that are comparable to what large employers provide. Since employees value retirement benefits, this development would tend to shift talented employees toward small businesses. Moreover, certain groups such as secondary earners in high income families who have high marginal tax rates, and therefore larger benefits from tax-preferred savings, might now be more inclined to work for small businesses as those businesses might now offer a retirement plan. Such shifts would make small businesses more competitive. The ensuing reallocation of talent across different sectors of the economy would increase efficiency. jspears on DSK30JT082PROD with PROPOSALS 5. Costs VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 PO 00000 Frm 00041 Fmt 4702 Sfmt 4702 fiduciary responsibilities. On the other hand, the enhanced disclosure and audit requirements applicable to large plans, together with the increased number of employers participating in a plan, might call attention to abuses that would have otherwise gone unnoticed had a small employer established its own plan. 6. Regulatory Alternatives The Treasury Department and the IRS considered alternatives to the proposed regulation. One alternative would have been to extend the proposed regulations to include defined benefit MEPs. However, this alternative was rejected because defined benefit plans raise additional issues, including issues arising from the minimum funding requirements and spinoff rules, such as the treatment in such a spinoff of any plan underfunding or overfunding. Commenters are asked, in the Comments and Requests for Public Hearing section of the preamble, to address those issues, as well as the circumstances in which the exception to the unified plan rule should be available to defined benefit plans. The Treasury Department and the IRS also considered whether the proposed regulation should include a more streamlined process for a section 413(c) plan administrator to satisfy the requirements for the exception to the unified plan rule. However, the notice requirements are intended to ensure 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, and the timing requirements are intended to give the unresponsive participating employer an adequate opportunity to take that remedial action or initiate a spinoff. These procedural requirements strike a balance between providing protection for unresponsive participating employers and their employees and not unduly burdening defined contribution MEPs. In the Comments and Requests for Public Hearing section of the preamble, commenters are asked to address whether the regulations should add mechanisms to avoid the potential for repetitive notices, as well as whether additional procedures should be added to facilitate the resolution of disputes between a section 413(c) plan administrator and an unresponsive participating employer. E:\FR\FM\03JYP1.SGM 03JYP1 31787 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules 7. Tables TABLE 1—RETIREMENT PLAN COVERAGE BY EMPLOYER SIZE Workers Establishment size: Number of workers Establishments Share with access to a retirement plan (%) Share participating in a retirement plan (%) 49 65 79 89 66 34 46 58 76 50 1–49 ................................................................................................................................. 50–99 ............................................................................................................................... 100–499 ........................................................................................................................... 500+ ................................................................................................................................. All ..................................................................................................................................... Share offering a retirement plan (%) 45 75 88 94 48 Source: These statistics apply to private industry. U.S. Bureau of Labor Statistics, National Compensation Survey, Employee Benefits in the U.S. (March 2018). TABLE 2—CURRENT STATISTICS ON MEPS Number of MEPs MEP Defined Contribution Plans ...................................................... As a share of all ERISA Defined Contribution Plans ....................... MEP Defined Contribution Plans ...................................................... 401(k) Plans ............................................................................... Other Defined Contribution Plans .............................................. 4,630 0.7% 4,630 4,391 239 Total participants Active participants 4.4 million ......... 4.4% ................. 4.4 million ......... 4.1 million ......... 0.4 million ......... 3.7 million ......... 4.6% ................. 3.7 million ......... 3.4 million ......... 0.3 million ......... Total assets $181 billion. 3.2%. $181 billion. $166 billion. $15 billion. Source: The Department of Labor performed these calculations using the 2016 Research File of Form 5500 filings. The estimates are weighted and rounded, which means they may not sum precisely. These estimates were derived by classifying a plan as a MEP if it indicated ‘‘multiple employer plan’’ status on the Form 5500 Part 1 Line A and if it did not report collective bargaining. TABLE 3—AVERAGE EXPENSE RATIOS OF MUTUAL FUNDS IN 401(k) PLANS IN BASIS POINTS, 2015 Domestic equity mutual funds Plan assets $1M–$10M ................................... $10M–$50M ................................. $50M–$100M ............................... $100M–$250M ............................. $250M–$500M ............................. $500M–$1B .................................. More than $1B ............................. International equity mutual funds 81 68 55 52 49 45 36 Domestic bond mutual funds 101 85 72 68 63 60 52 International bond mutual funds 72 59 44 40 36 33 26 Target date mutual funds 85 77 66 64 67 65 65 79 68 54 55 50 50 48 Balanced mutual funds (non-target date) 80 64 50 45 42 39 32 Source: Average expense ratios are expressed in basis points and asset-weighted. The sample includes plans with audited 401(k) filings in the BrightScope database for 2015 and comprises 15,110 plans with $1.4 trillion in mutual fund assets. Plans were included if they had at least $1 million in assets and between 4 and 100 investment options. BrightScope/ICI, ‘‘The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2015’’ (March 2018). TABLE 4—LARGER PLANS TEND TO HAVE LOWER FEES OVERALL Total plan cost (in basis points) Plan assets 10th Percentile jspears on DSK30JT082PROD with PROPOSALS $1M–$10M ................................................................................................................. $10M–$50M ............................................................................................................... $50M–$100M ............................................................................................................. $100M–$250M ........................................................................................................... $250M–$500M ........................................................................................................... $500M–$1B ................................................................................................................ More than $1B ........................................................................................................... Median 75 61 37 22 21 21 14 90th Percentile 111 91 65 54 48 43 27 162 129 93 74 66 59 51 Source: Data is plan-weighted. The sample is plans with audited 401(k) filings in the BrightScope database for 2015, which comprises 18,853 plans with $3.2 trillion in assets. Plans were included if they had at least $1 million in assets and between 4 and 100 investment options. BrightScope/ICI, ‘‘The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2015’’ (March 2018). VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 PO 00000 Frm 00042 Fmt 4702 Sfmt 4702 E:\FR\FM\03JYP1.SGM 03JYP1 31788 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules II. Paperwork Reduction Act The collection of information in these proposed regulations is in: § 1.413– 2(g)(3)(i)(B) (requirement to adopt plan language); § 1.413–2(g)(4) (requirement to provide notice with respect to a participating employer failure); § 1.413– 2(g)(7)(i)(C) (requirement that spun-off plan have the same substantive terms as MEP); and § 1.413–2(g)(7)(i)(A) (requirement to provide notice of a spinoff-termination). The collection of information contained in proposed § 1.413–2(g) will be carried out by plan administrators of defined contribution MEPs seeking to satisfy the conditions for the exception to the unified plan rule. The collection of information in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). jspears on DSK30JT082PROD with PROPOSALS 1. Plan Amendment Adoption Requirement, § 1.413–2(g)(3)(i)(B) Section 1.413–2(g)(3)(i)(B) states that as a condition of the exception to the unified plan rule, a defined contribution MEP must be amended to include plan language that describes the procedures that would be followed to address participating employer failures, including the applicable procedures that apply if an unresponsive participating employer does not respond to the section 413(c) plan administrator’s requests to remedy the failures. A defined contribution MEP will not be eligible for the exception to the unified plan rule if it does not satisfy this plan-language requirement. Without it, the defined contribution MEP will not be able to avail itself of the exception to the unified plan rule, and will continue to be at risk of disqualification due to the actions or inactions of a single unresponsive participating employer. Since only one amendment is required, this is a onetime paperwork burden for each defined contribution MEP. In addition, after final regulations are issued, the IRS intends to publish a model plan amendment, which will help to minimize the burden. We estimate that the burden for this requirement under the Paperwork Reduction Act of 1995 will be three hours per defined contribution MEP. Given the size of the burden and the potential benefits of satisfying the exception to the unified plan rule, we estimate that approximately 80 percent of defined contribution MEPs (3,704 VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 MEPs 24) will amend their plans to satisfy this condition. Therefore, the total burden of this requirement is estimated to be 11,112 hours (3,704 defined contribution MEPs times three hours). However, because each defined contribution MEP that adopts an amendment will do so on a one-time basis, to determine an annual estimate, the total time is divided by three, or 3,704 hours annually (3,704 defined contribution MEPs times one hour). 2. Notice Requirements, § 1.413–2(g)(4) Notice is another condition of the exception to the unified plan rule. The proposed regulations would require a section 413(c) plan administrator to send up to three notices informing the unresponsive participating employer of the participating employer failure and the consequences if the employer fails to take remedial action or initiate a spinoff from the defined contribution MEP. After each notice is provided, the employer has 90 days to take appropriate remedial action or initiate a spinoff from the defined contribution MEP. If the employer takes those actions after the first or second notice is provided, subsequent notices are not required. Thus, it is possible that a section 413(c) plan administrator will send fewer than three notices to an employer. However, because the notice requirements only apply if an employer has already been unresponsive to the section 413(c) plan administrator’s requests, we have estimated that in most cases, all three notices will be provided. We estimate that the burden of preparing the three notices will be three hours. Most of this burden relates to the first notice, which must describe the qualification failure and the potential consequences if the employer fails to take action to address it. The burdens of preparing the second and third notices are expected to be relatively insignificant, given that these notices must generally repeat the information that was included in the first notice. We estimate that approximately 33.3 percent of all defined contribution MEPs (1,542 defined contribution MEPs) have or will have an unresponsive participating employer, necessitating the sending of these notices on an annual basis. Therefore, we estimate a burden of 4,626 hours (1,542 defined contribution MEPs times three hours). We expect to be able to adjust these estimates based on 24 This calculation uses data from the 2016 Form 5500, ‘‘Annual Return/Report of Employee Benefit Plan.’’ As noted earlier, these filings indicate that there are approximately 4,630 defined contribution MEPs. PO 00000 Frm 00043 Fmt 4702 Sfmt 4702 experience after the regulations are finalized. Section 1.413–2(g)(4) also includes the burden of notice distribution. All three notices must be sent to the unresponsive participating employer. The third notice will also be provided to plan participants who are employees of the unresponsive participating employer and to the Department of Labor. We estimate that, on average, a section 413(c) plan administrator will send the third notice to approximately 50 recipients (employees of the unresponsive participating employer, the employer, and the Department of Labor). We expect that the burden of distributing these notices will be two hours per defined contribution MEP, for a total burden of 3,084 hours (1,542 defined contribution MEPs times two hours). 3. Terms of Spun-Off Plan, § 1.413– 2(g)(7)(i)(C) After the third notice is provided, § 1.413–2(g)(7)(i)(C) requires a section 413(c) plan administrator to implement a spinoff of the plan assets attributable to employees of an unresponsive participating employer. The assets must be spun-off into a separate plan that has the same substantive plan terms as the defined contribution MEP. We estimate that in a given year, a spinofftermination for an unresponsive participating employer will be made with respect to 20 percent of all defined contribution MEPs (926 defined contribution MEPs therefore will be subject to this requirement). We also estimate that the burden associated with the requirement to create a spinoff plan will be 10 hours. Therefore, the total burden is estimated to be 9,260 hours (926 defined contribution MEPs times 10). 4. Notice of Spinoff-Termination, § 1.413–2(g)(7)(i)(A) A section 413(c) plan administrator implementing a spinoff-termination pursuant to § 1.413–2(g)(7) must provide notification of the spinoff-termination to participants who are employees of the unresponsive employer. This notice requirement is in § 1.413–2(g)(7)(i)(A). We estimate that in a given year, 20 percent of all defined contribution MEPs (926 defined contribution MEPs) will implement a spinoff-termination of an unresponsive participating employer, and notice to participants will need to be provided with respect to those spinoff-terminations. Using the same numbers as the estimates for notice requirements under § 1.413–2(g)(4), we estimate that for a defined contribution MEP that uses the E:\FR\FM\03JYP1.SGM 03JYP1 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules exception to the unified plan rule, approximately 50 notices of a spinofftermination will need to be sent to participants who are employees of the unresponsive participating employer (and their beneficiaries). We also estimate that the total burden for this requirement is five hours. Based on this number, we estimate that the burden of preparing and distributing the notices will be 4,630 hours (926 defined contribution MEPs times five hours). jspears on DSK30JT082PROD with PROPOSALS 5. Reporting Spinoff or SpinoffTermination to IRS, §§ 1.413–2(g)(6)(ii) and (g)(7)(iv) Any spinoff or spinoff-termination from a defined contribution MEP under the proposed regulations must be reported to the IRS (in accordance with forms, instructions, and other guidance). Because the IRS anticipates issuing a new form or revising an existing form for this purpose, the estimated reporting burden associated with proposed §§ 1.413–2(g)(6)(ii) and (g)(7)(iv) will be reflected in the reporting burden associated with those forms, and therefore is not included here. Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP; Washington, DC 20224. Comments on the collection of information should be received by September 3, 2019. Comments are specifically requested concerning: Whether the proposed collection of information is necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility; The accuracy of the estimated burden associated with the proposed collection of information; How the quality, utility, and clarity of the information to be collected may be enhanced; How the burden of complying with the proposed collections of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of service to provide information. Estimated total average annual recordkeeping burden: 25,304 hours. Estimated average annual burden per response: Between 7 and 27 hours. VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 Estimated number of recordkeepers: 926 to 3,704. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. III. Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes certain requirements with respect to federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely to have a significant economic impact on a substantial number of small entities. Unless an agency determines that a proposal is not likely to have a significant economic impact on a substantial number of small entities, section 603 of the RFA requires the agency to present an initial regulatory flexibility analysis (IRFA) of the proposed rule. The Treasury Department and the IRS have not determined whether the proposed rule, when finalized, will likely have a significant economic impact on a substantial number of small entities. The determination of whether creating an exception to the unified plan rule for defined contribution MEPs will have a significant economic impact requires further study. However, because there is a possibility of significant economic impact on a substantial number of small entities, an IRFA is provided in these proposed regulations. The Treasury Department and the IRS invite comments on both the number of entities affected and the economic impact on small entities. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel of Advocacy of the Small Business Administration for comment on its impact on small business. 1. Need for and Objectives of the Rule As discussed earlier in this preamble, under the unified plan rule, the failure of one employer participating in a MEP to satisfy a qualification requirement or to provide information needed to determine compliance with a qualification requirement puts the taxfavored status of the entire MEP at risk. PO 00000 Frm 00044 Fmt 4702 Sfmt 4702 31789 By creating an exception to the unified plan rule, the proposed rule would ensure that, in certain circumstances, compliant participating employers will continue to maintain a qualified plan. Offering a workplace retirement plan is a valuable tool for small businesses in recruiting and retaining employees. By retaining tax-favored status in a defined contribution MEP, participating employers will continue to be able to offer a workplace retirement plan for their employees. The proposed rule is expected to encourage the establishment of new defined contribution MEPs, as well as increase the participation of employers in existing defined contribution MEPs, in accordance with Executive Order 13847 and the policy of expanding workplace retirement plan coverage. MEPs are an efficient way to reduce costs and complexity associated with establishing and maintaining defined contribution plans, which could encourage more plan formation and broader availability of more affordable workplace retirement savings plans, especially among small employers and certain working owners. Thus, the Treasury Department and the IRS intend and expect that the proposed rule would deliver benefits primarily to the employees of many small businesses and their families, as well as, many small businesses themselves. 2. Affected Small Entities The Small Business Administration estimates in its 2018 Small Business Profile that 99.9 percent of United States businesses meet its definition of a small business.25 The applicability of these proposed regulations does not depend on the size of the business, as defined by the Small Business Administration. The Treasury Department and the IRS expect that the smallest businesses, those with less than 50 employees, are most likely to benefit from the savings derived from retaining tax-favored status in a defined contribution MEP, as well as increasing participation in defined contribution MEPs, which are expected to occur as a result of the proposed rule. In Section 7 of the Regulatory Impact Analysis, see Table 1, which provides statistics on retirement plan coverage by the size of the employer. These same types of employers, which are disproportionately small businesses, are 25 The Small Business Administration, Office of Advocacy, 2018 Small Business Profile. https:// www.sba.gov/sites/default/files/advocacy/2018Small-Business-Profiles-US.pdf. Last accessed 03/ 28/2019. For purposes of the 2018 Small Business Profile, small businesses are defined as firms employing fewer than 500 employees. E:\FR\FM\03JYP1.SGM 03JYP1 31790 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules jspears on DSK30JT082PROD with PROPOSALS more likely to participate in a workplace retirement plan after the proposed rule is finalized. The proposed rule will also affect small entities that participate in MEPs at the time the rule is finalized. 3. Impact of the Rule Under the existing unified plan rule, a MEP may be disqualified due to the actions of one unresponsive participating employer. Upon disqualification, employers participating in a MEP and their employees would lose the tax benefits of participating in a qualified retirement plan (deduction for contributions, exclusion of investment returns, and deferred income recognition for employees). By creating an exception to the unified plan rule, the proposed regulation would allow a defined contribution MEP to remain qualified and thereby retain tax-favored benefits for participating employers and their employees. For example, if a defined contribution MEP that would have otherwise been disqualified satisfies the conditions for the exception to the unified plan rule, small entities that participate in the MEP will be able to continue to make contributions to the defined contribution MEP that are deductible under section 404(a)(3). In addition, as previously stated in the Special Analysis section of this preamble, this proposed rule could potentially result in an expansion of defined contribution MEPs, which could create a more affordable option for retirement savings coverage for many small businesses, thereby potentially yielding economic benefits for participating employers and their employees. Some advantages of a workplace retirement plan (including 401(k) plans, SEP–IRAs, and SIMPLE IRAs) over IRA-based savings options outside the workplace include: (1) Higher contribution limits; (2) potentially lower investment management fees, especially in larger plans; (3) a well-established uniform regulatory structure with important consumer protections, including qualification requirements relating to protected benefits, vesting, disclosures, and spousal protections; (4) automatic enrollment; and (5) stronger protections from creditors. At the same time, workplace retirement plans provide employers with choice among plan features and the flexibility to tailor retirement plans that meet their business and employment needs. The ERISA recordkeeping and reporting requirements could decrease for some small employers that would have maintained a single-employer defined contribution plan but instead VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 join a defined contribution MEP. This includes costs associated with filing Form 5500 and fulfilling audit requirements to the extent a MEP is considered a single plan under ERISA. Thus, one Form 5500 and audit report would satisfy the reporting requirements, and each participating employer would not need to file its own, separate Form 5500 and, for large plans or those few small plans that do not meet the small plan audit waiver, an audit report. The cost savings of an employer participating in a defined contribution MEP may be partially offset by the costs of complying with the conditions for the exception to the unified plan rule, including new recordkeeping and reporting requirements. Additional costs from these actions will be incurred by the section 413(c) plan administrator, who among other things is tasked with adopting plan language (§ 1.413– 2(g)(3)(i)(B)), providing notice concerning a participating employer failure to unresponsive participating employers, participants, beneficiaries, and the Department of Labor (§ 1.413– 2(g)(4)), notifying participants and beneficiaries of a spinoff-termination (§ 1.413–2(g)(7)(ii)), and implementing a spinoff of the MEP assets related to an unresponsive participating employer and creating a spun-off plan document (§ 1.413–2(g)(7)(i)). Although the Treasury Department and the IRS do not have sufficient data to determine precisely the likely extent of the increased costs of compliance, the estimated burden of complying with the recordkeeping and reporting requirements are described in the Paperwork Reduction Act section of the preamble. While the burdens associated with the recordkeeping and reporting requirements are imposed on the defined contribution MEP and not the participating employers, those additional costs may be directly passed on to participating employers. Another partial offset to the cost savings is the potential for an unresponsive participating employer to have its participation in a MEP terminated as a result of the MEP’s compliance with these proposed regulations. The proposed regulations state that if an unresponsive participating employer fails to take appropriate remedial action to correct a qualification failure, one of the following actions must occur in order for the MEP to meet the conditions for the exception to the unified plan rule: (a) A spinoff initiated by the unresponsive participating employer and implemented by the section 413(c) plan administrator or (b) a spinoff- PO 00000 Frm 00045 Fmt 4702 Sfmt 4702 termination pursuant to plan terms. The Treasury Department and the IRS anticipate that compared to the number of small entities that will benefit from these proposed rules, relatively few employers will have their plans spun-off or spun-off and terminated. As previously stated in the Regulatory Impact Analysis of this preamble, the Treasury Department and the IRS considered alternatives to the proposed regulations. One of the conditions that a defined contribution MEP must satisfy in order to be eligible for the exception to the unified plan rule is that the section 413(c) plan administrator provides notice and an opportunity for the unresponsive participating employer to take action with respect to the participating employer failure. The proposed regulations would require that the section 413(c) plan administrator provide up to three notices to the unresponsive participating employer, informing the employer (and in some cases, participants and the Department of Labor) of the participating employer failure and the consequences for failing to take remedial action or initiate a spinoff from the defined contribution MEP. After each notice is provided, the unresponsive participating employer has 90 days to take appropriate remedial action or initiate a spinoff from the defined contribution MEP. For more information about the notice requirements, see Section II.B of the Explanation of Provisions in this preamble. In addition to the alternatives discussed in the Regulatory Impact Analysis of this preamble, the Treasury Department and the IRS considered whether the proposed regulations should reduce the number of notices or the timing between providing notices in order for a section 413(c) plan administrator to satisfy this condition for the exception to the unified plan rule. The notice and accompanying timing requirements were provided for because the notice procedures are intended to ensure that an unresponsive participating employer and its employees are aware of the adverse consequences if the employer neither takes appropriate remedial action nor initiates a spinoff, and the timing requirements are intended to give the unresponsive participating employer sufficient time to take that remedial action or initiate a spinoff. The Treasury Department and the IRS believe that, given the adverse consequences of a spinoff-termination to plan participants, the notice and accompanying timing requirements strike a balance between providing protection for unresponsive participating employers and their E:\FR\FM\03JYP1.SGM 03JYP1 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules employees and not unduly burdening the section 413(c) plan administrators in defined contribution MEPs. In the Comments and Requests for Public Hearing section of the preamble, commenters are asked to address whether the regulations should add mechanisms to avoid the potential for repetitive notices, as well as whether additional procedures should be added to facilitate the resolution of disputes between a section 413(c) plan administrator and an unresponsive participating employer. 4. Duplicate, Overlapping, or Relevant Federal Rules The proposed rule would not conflict with any relevant federal rules. As discussed above, the proposed rule would merely create an exception to the unified plan rule for defined contribution MEPs. jspears on DSK30JT082PROD with PROPOSALS Comments and Requests for Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the Treasury Department and the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed rules. Comments specifically are requested on the following topics: • The circumstances, if any, in which the exception to the unified plan rule should be available to defined benefit plans (taking into account issues arising from the minimum funding requirements and spinoff rules for defined benefit plans, including the treatment in such a spinoff of any plan underfunding or overfunding). • Whether the regulations should include additional requirements for MEPs to be eligible for the exception to the unified plan rule, including additional procedures to facilitate the resolution of disputes between a section 413(c) plan administrator and an unresponsive participating employer. • Whether the regulations should add appropriate mechanisms to avoid the potential for repetitive notices or to shorten the notice period for a potential qualification failure that becomes a known qualification failure. Those mechanisms might include, for example, treating the first notice that the section 413(c) plan administrator provided in connection with the potential qualification failure as satisfying the requirement to provide the first notice in connection with the known qualification failure, with VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 appropriate modification of the second and third notices. • For purposes of a spinoff, how to treat participants who have a single account with assets attributable to service with the unresponsive participating employer and one or more other participating employers, or who have a separate rollover account that is not attributable to service with the unresponsive participating employer. • What additional guidance should be provided on terminating a plan in the case of a spinoff-termination. This might include, for example, rules that are similar to the relief provided in section 4, Q&A–1, of Rev. Proc. 2003–86, 2003– 2 C.B. 1211, that any other plan maintained by an unresponsive participating employer will not be treated as an alternative plan under § 1.401(k)–1(d)(4)(i) for purposes of the ability to make distributions upon termination of the spun-off plan. It might also address the § 1.411(a)– 11(e)(1) rules for distributions upon plan termination • Whether there are any studies that would help to quantify the impact of the proposed regulations. Also, consistent with the Executive Order, comments are specifically requested on any steps that the Secretary of Labor should take to facilitate the implementation of these proposed regulations. The Department of Labor has informed the Treasury Department and the IRS that a section 413(c) plan administrator implementing a spinoff-termination may have concerns about its fiduciary responsibility both to the MEP and to the spun-off plan, as well as potential prohibited transaction issues. Commenters are encouraged to provide feedback on these issues and address the need for additional interpretive guidance or prohibited transaction exemptions from the Department of Labor to facilitate the implementation of these regulations.26 Copies of comments on these topics will be forwarded to the Department of Labor. All comments will be available for public inspection and copying at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person who timely submits written comments. If a public hearing is scheduled, notice of 26 For an example of this type of interpretative guidance and a related prohibited transaction exemption in the context of a terminating abandoned plan, see 29 CFR 2578.1 (establishing procedures for qualified termination administrators to terminate abandoned plans and distribute benefits with limited liability under title I of ERISA) and Prohibited Transaction Exemption 2006–06 (71 FR 20856, Apr. 21, 2006). PO 00000 Frm 00046 Fmt 4702 Sfmt 4702 31791 the date, time, and place of the public hearing will be published in the Federal Register. Drafting Information The principal authors of these regulations are Jamie Dvoretzky and Pamela Kinard, Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes (EEE)). However, other personnel from the IRS and the Treasury Department participated in the development of these regulations. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part: ■ Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.413–2 is amended by: ■ 1. Removing paragraph (a)(3)(iv). ■ 2. Adding and reserving paragraphs (e) and (f). ■ 3. Adding paragraph (g). The additions read as follows: ■ § 1.413–2 Special rules for plans maintained by more than one employer. * * * * * (e) [Reserved] (f) [Reserved] (g) Qualification of a section 413(c) plan—(1) General rule. Except as provided in paragraph (g)(2) of this section, the qualification of a section 413(c) plan under section 401(a) or 403(a), taking into account the rules of section 413(c) and this section, is determined with respect to all participating employers. Consequently, the failure by one participating employer (or by the plan itself) to satisfy an applicable qualification requirement will result in the disqualification of the section 413(c) plan for all participating employers. (2) Exception to general rule for participating employer failures—(i) In general. A section 413(c) plan that is a defined contribution plan will not be disqualified on account of a participating employer failure, provided that the following conditions are satisfied— (A) The section 413(c) plan satisfies the eligibility requirements of paragraph (g)(3) of this section; (B) The section 413(c) plan administrator satisfies the notice E:\FR\FM\03JYP1.SGM 03JYP1 jspears on DSK30JT082PROD with PROPOSALS 31792 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules requirements described in paragraph (g)(4) of this section; (C) If the unresponsive participating employer fails to take appropriate remedial action with respect to the participating employer failure, as described in paragraph (g)(5)(ii) of this section, the section 413(c) plan administrator implements a spinoff described in paragraph (g)(2)(ii) of this section; and (D) The section 413(c) plan administrator complies with any information request that the IRS or a representative of the spun-off plan makes in connection with an IRS examination of the spun-off plan, including any information request related to the participation of the unresponsive participating employer in the section 413(c) plan for years prior to the spinoff. (ii) Spinoff. A spinoff is described in this paragraph (g)(2)(ii) if it satisfies either of the following requirements— (A) The spinoff is initiated by the unresponsive participating employer, as described in paragraph (g)(5)(iii) of this section, and implemented by the section 413(c) plan administrator, as described in paragraph (g)(6)(ii) of this section; or (B) The spinoff is a spinofftermination pursuant to plan terms, as described in paragraph (g)(7) of this section. (iii) Definitions. The following definitions apply for purposes of this paragraph (g): (A) Employee. An employee is a current or former employee of a participating employer. (B) Known qualification failure. A known qualification failure is a failure to satisfy a qualification requirement with respect to a section 413(c) plan that is identified by the section 413(c) plan administrator and is attributable solely to an unresponsive participating employer. For purposes of this paragraph (g)(2)(iii)(B), an unresponsive participating employer includes any employer that is treated as a single employer with that unresponsive participating employer under section 414(b), (c), (m), or (o)). (C) Participating employer. A participating employer is one of the employers maintaining a section 413(c) plan. (D) Participating employer failure. A participating employer failure is a known qualification failure or a potential qualification failure. (E) Potential qualification failure. A potential qualification failure is a failure to satisfy a qualification requirement with respect to a section 413(c) plan that the section 413(c) plan administrator reasonably believes might exist, but the VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 section 413(c) plan administrator is unable to determine whether the qualification requirement is satisfied solely due to an unresponsive participating employer’s failure to provide data, documents, or any other information necessary to determine whether the section 413(c) plan is in compliance with the qualification requirement as it relates to the participating employer. For purposes of this paragraph (g)(2)(iii)(E), an unresponsive participating employer includes any employer that is treated as a single employer with that unresponsive participating employer under section 414(b), (c), (m), or (o)). (F) Section 413(c) plan administrator. A section 413(c) plan administrator is the plan administrator of a section 413(c) plan, determined under the rules of section 414(g). (G) Unresponsive participating employer. An unresponsive participating employer is a participating employer in a section 413(c) plan that fails to comply with 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. (3) Eligibility for exception to general rule—(i) In general. To be eligible for the exception described in paragraph (g)(2) of this section, a section 413(c) plan must satisfy the following requirements— (A) Practices and procedures. The section 413(c) plan administrator has established practices and procedures (formal or informal) that are reasonably designed to promote and facilitate overall compliance with applicable Code requirements, including procedures for obtaining information from participating employers. (B) Plan language. The section 413(c) plan document describes the procedures that would be followed to address participating employer failures, including the procedures that the section 413(c) plan administrator would follow if the unresponsive participating employer does not take appropriate remedial action or initiate a spinoff pursuant to paragraph (g)(5) of this section. (C) Not under examination. At the time the first notice described in paragraph (g)(4)(i) of this section is provided to the unresponsive participating employer, the section 413(c) plan is not under examination PO 00000 Frm 00047 Fmt 4702 Sfmt 4702 under the rules of paragraph (g)(3)(ii) of this section. (ii) Under examination. For purposes of this section, a plan is under examination if— (A) The plan is under an Employee Plans examination (that is, an examination of a Form 5500 series or other examination by the Employee Plans Office of the Tax Exempt and Government Entities Division of the IRS (Employee Plans) (or any successor IRS office that has jurisdiction over qualified retirement plans)); (B) The plan is under investigation by the Criminal Investigation Division of the IRS (or its successor); or (C) The plan is treated as under an Employee Plans examination under the rules of paragraph (g)(3)(iii) of this section. (iii) Certain plans treated as under an Employee Plans examination—(A) Notification of pending examination. For purposes of this section, a plan is treated as under an Employee Plans examination if the section 413(c) plan administrator, or an authorized representative, has received verbal or written notification from Employee Plans of an impending Employee Plans examination, or of an impending referral for an Employee Plans examination. A plan is also treated as under an Employee Plans examination if it has been under an Employee Plans examination and the plan has an appeal pending with the IRS Office of Appeals (or its successor), or is in litigation with the IRS, regarding issues raised in an Employee Plans examination. (B) Pending determination letter application—(1) Possible failures identified by IRS. For purposes of this section, a section 413(c) plan is treated as under an Employee Plans examination if a Form 5300, ‘‘Application for Determination for Employee Benefit Plan,’’ Form 5307, ‘‘Application for Determination for Adopters of Modified Volume Submitter Plans,’’ or Form 5310, ‘‘Application for Determination for Terminating Plan’’ (or any successor form for one or more of these forms) has been submitted with respect to the plan and the IRS agent notifies the applicant of possible qualification failures, whether or not the applicant is officially notified of an examination. This includes a case in which, for example, a determination letter on plan termination had been submitted with respect to the plan, and an IRS agent notifies the applicant that there are partial termination concerns. In addition, if, during the review process, the IRS agent requests additional information that indicates the existence of a failure not previously E:\FR\FM\03JYP1.SGM 03JYP1 jspears on DSK30JT082PROD with PROPOSALS Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules identified by the applicant, then the plan is treated as under an Employee Plans examination (even if the determination letter application is subsequently withdrawn). (2) Failures identified by determination letter applicant. For purposes of paragraph (g)(3)(iii)(B)(1) of this section, an IRS agent is not treated as notifying a determination letter applicant of a possible qualification failure if the applicant (or the authorized representative) has identified the failure, in writing, to the reviewing IRS agent before the agent recognizes the existence of the failure or addresses the failure in communications with the applicant. For purposes of this paragraph (g)(3)(iii)(B)(2), submission of a determination letter application does not constitute an identification of a failure to the IRS. (C) Aggregated plans. For purposes of this section, a plan is treated as under an Employee Plans examination if it is aggregated for purposes of satisfying the nondiscrimination requirements of section 401(a)(4), the minimum participation requirements of section 401(a)(26), the minimum coverage requirements of section 410(b), or the requirements of section 403(b)(12)(A)(i), with any plan that is under an Employee Plans examination. In addition, a plan is treated as under an Employee Plans examination with respect to a failure of a qualification requirement (other than those described in the preceding sentence) if the plan is aggregated with another plan for purposes of satisfying that qualification requirement (for example, section 401(a)(30), 415, or 416) and that other plan is under an Employee Plans examination. For purposes of this paragraph (g)(3)(iii)(C), the term aggregation does not include consideration of benefits provided by various plans for purposes of the average benefits test set forth in section 410(b)(2). (4) Notice requirements. The section 413(c) plan administrator satisfies the notice requirements with respect to a participating employer failure if it satisfies the requirements of this paragraph (g)(4). (i) First notice. The section 413(c) plan administrator must provide notice to the unresponsive participating employer describing the participating employer failure, the remedial actions the employer would need to take to remedy the failure, and the employer’s option to initiate a spinoff of plan assets and account balances attributable to participants who are employees of that employer. In addition, the notice must explain the consequences under plan VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 terms if the unresponsive participating employer neither takes appropriate remedial action with respect to the participating employer failure nor initiates a spinoff, including the possibility that a spinoff of assets and account balances attributable to participants who are employees of that employer would occur, followed by a termination of that plan. (ii) Second notice. If, by the end of the 90-day period following the date the first notice described in paragraph (g)(4)(i) of this section is provided, the unresponsive participating employer neither takes appropriate remedial action with respect to the participating employer failure nor initiates a spinoff, then the section 413(c) plan administrator must provide a second notice to the employer. The second notice must be provided no later than 30 days after the expiration of the 90-day period described in the preceding sentence. The second notice must include the information required to be included in the first notice and must also specify that if, within 90 days following the date the second notice is provided, the employer neither takes appropriate remedial action with respect to the participating employer failure nor initiates a spinoff, a notice describing the participating employer failure and the consequences of not correcting that failure will be provided to participants who are employees of the unresponsive participating employer (and their beneficiaries) and to the Department of Labor. (iii) Third notice. If, by the end of the 90-day period following the date the second notice described in paragraph (g)(4)(ii) of this section is provided, the unresponsive participating employer neither takes appropriate remedial action with respect to the participating employer failure nor initiates a spinoff, then the section 413(c) plan administrator must provide a third notice to that employer. The third notice must be provided no later than 30 days after the expiration of the 90-day period described in the preceding sentence. Within this time period, the third notice must also be provided to participants who are employees of that employer (and their beneficiaries) and to the Office of Enforcement of the Employee Benefits Security Administration in the Department of Labor (or its successor office). The third notice must include the information required to be included in the first notice, the deadline for employer action, and an explanation of any adverse consequences to participants in the event that a spinofftermination occurs, and state that the notice is being provided to participants PO 00000 Frm 00048 Fmt 4702 Sfmt 4702 31793 who are employees of the unresponsive participating employer (and their beneficiaries) and to the Department of Labor. (5) Actions by unresponsive participating employer—(i) In general. An unresponsive participating employer takes appropriate remedial action with respect to a participating employer failure for purposes of paragraph (g)(2)(i)(C) of this section if it satisfies the requirements of paragraph (g)(5)(ii) of this section. Alternatively, an unresponsive participating employer initiates a spinoff with respect to a participating employer failure for purposes of paragraph (g)(2)(ii)(A) of this section if the employer satisfies the requirements of paragraph (g)(5)(iii) of this section. The final deadline for an unresponsive participating employer to take one of these actions is 90 days after the third notice is provided. See paragraph (g)(7) of this section for the consequences of the employer’s failure to meet this deadline. (ii) Appropriate remedial action—(A) Appropriate remedial action with respect to potential qualification failure. An unresponsive participating employer takes appropriate remedial action with respect to a potential qualification failure if the employer provides data, documents, or any other information necessary for the section 413(c) plan administrator to determine whether a qualification failure exists. If the unresponsive participating employer provides this information, the section 413(c) plan administrator determines that, based on this information, a qualification failure exists that is attributable solely to that employer, and the participating employer fails to comply with reasonable and timely requests from the section 413(c) plan administrator to take actions that are needed to correct that qualification failure, then the qualification failure becomes a known qualification failure. In that case, the section 413(c) plan will be eligible for the exception in paragraph (g)(2) of this section with respect to the known qualification failure by satisfying the conditions set forth in paragraph (g)(2) of this section with respect to that known qualification failure, taking into account the rules of paragraph (g)(6)(i) of this section. (B) Appropriate remedial action with respect to known qualification failure. An unresponsive participating employer takes appropriate remedial action with respect to a known qualification failure if the employer takes action, such as making corrective contributions, that corrects, or enables the section 413(c) plan administrator to correct, the known qualification failure. E:\FR\FM\03JYP1.SGM 03JYP1 jspears on DSK30JT082PROD with PROPOSALS 31794 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules (iii) Employer-initiated spinoff. An unresponsive participating employer initiates a spinoff pursuant to this paragraph (g)(5)(iii) if, after receiving a notice described in paragraph (g)(4) of this section, the employer directs the section 413(c) plan administrator to spin off plan assets and account balances held on behalf of its employees to a separate single-employer plan established and maintained by that employer in a manner consistent with plan terms. (6) Actions by section 413(c) plan administrator—(i) Rules for a potential qualification failure that becomes a known qualification failure. For purposes of applying paragraph (g)(2) of this section to a potential qualification failure that becomes a known qualification failure, actions taken (including notices provided) when the failure was a potential qualification failure are not taken into account. For example, a notice that the section 413(c) plan administrator provided in connection with the potential qualification failure would not satisfy the notice requirements for the known qualification failure. However, in determining whether the section 413(c) plan is under examination, as described in paragraph (g)(3)(iii) of this section, as of the date of the first notice describing the known qualification failure, the section 413(c) plan administrator will be treated as providing that notice on the date the first notice was provided with respect to the related potential qualification failure, but only if the following conditions are satisfied— (A) After determining that a qualification failure exists, the section 413(c) plan administrator makes a reasonable and timely request to the participating employer to take actions that are needed to correct the failure, and (B) As soon as reasonably practicable after the participating employer fails to respond to that request, the section 413(c) plan administrator provides the first notice described in paragraph (g)(4)(i) of this section with respect to the known qualification failure. (ii) Implementing employer-initiated spinoff. If an unresponsive participating employer initiates a spinoff pursuant to paragraph (g)(5)(iii) of this section by directing the section 413(c) plan administrator to spin off the assets and account balances held on behalf of its employees to a separate single-employer plan established and maintained by the employer, the section 413(c) plan administrator must implement and complete a spinoff of the assets and account balances held on behalf of the employees of the employer that are VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 attributable to their employment by the employer within 180 days of the date on which the unresponsive participating employer initiates the spinoff. The section 413(c) plan administrator must report the spinoff to the IRS (in the manner prescribed by the IRS in forms, instructions, and other guidance). (7) Spinoff-termination—(i) Spinoff. If the unresponsive participating employer neither takes appropriate remedial action described in paragraph (g)(5)(ii) of this section nor initiates a spinoff pursuant to paragraph (g)(5)(iii) of this section, then, in accordance with plan language, the section 413(c) plan administrator must take the following steps as soon as reasonably practicable after the deadline described in paragraph (g)(5)(i) of this section— (A) Send notification of spinofftermination to participants who are employees of the unresponsive participating employer (and their beneficiaries) as described in paragraph (g)(7)(iii) of this section. (B) Stop accepting contributions from the unresponsive participating employer; (C) Implement a spinoff, in accordance with the transfer requirements of section 414(l) and the anti-cutback requirements of section 411(d)(6), of the plan assets and account balances held on behalf of employees of the unresponsive participating employer that are attributable to their employment by that employer to a separate singleemployer plan and trust that has the same plan administrator, trustee, and substantive plan terms as the section 413(c) plan; and (D) Terminate the spun-off plan and distribute assets of the spun-off plan to plan participants (and their beneficiaries) as soon as reasonably practicable after the plan termination date. (ii) Termination of spun-off plan. In terminating the spun-off plan, the section 413(c) plan administrator must— (A) Reasonably determine whether, and to what extent, the survivor annuity requirements of sections 401(a)(11) and 417 apply to any benefit payable under the plan and take reasonable steps to comply with those requirements (if applicable); (B) Provide each participant and beneficiary with a nonforfeitable right to his or her accrued benefits as of the date of plan termination, subject to income, expenses, gains, and losses between that date and the date of distribution; and (C) Notify the participants and beneficiaries of their rights under section 402(f). PO 00000 Frm 00049 Fmt 4702 Sfmt 4702 (iii) Contents of the notification of spinoff-termination. For the notice required to be provided in paragraph (g)(7)(i)(A), the section 413(c) plan administrator must provide information relating to the spinoff-termination to participants who are employees of the unresponsive participating employer (and their beneficiaries), including the following— (A) Identification of the section 413(c) plan and contact information for the section 413(c) plan administrator; (B) The effective date of the spinofftermination; (C) A statement that no more contributions will be made to the section 413(c) plan; (D) A statement that as soon as practicable after the spinoff-termination, participants and beneficiaries will receive a distribution from the spun-off plan; and (E) A statement that before the distribution occurs, participants and beneficiaries will receive additional information about their options with respect to that distribution. (iv) Reporting spinoff-termination. The section 413(c) plan administrator must report a spinoff-termination pursuant to this paragraph (g)(7) to the IRS (in the manner prescribed by the IRS in forms, instructions, and other guidance). (8) Other rules—(i) Form of notices. Any notice provided pursuant to paragraph (g)(4) or (g)(7)(i)(A) of this section may be provided in writing or in electronic form. For notices provided to participants and beneficiaries, see generally § 1.401(a)–21 for rules permitting the use of electronic media to provide applicable notices to recipients with respect to retirement plans. (ii) Qualification of spun-off plan— (A) In general. In the case of any plan that is spun off in accordance with paragraph (g)(6)(ii) or (g)(7) of this section, any participating employer failure that would have affected the qualification of the section 413(c) plan, but for the application of the exception set forth in paragraph (g)(2) of this section, will be a qualification failure with respect to the spun-off plan. (B) Favorable tax treatment upon termination. Notwithstanding paragraph (g)(8)(ii)(A) of this section, distributions made from a spun-off plan that is terminated in accordance with paragraph (g)(7) of this section will not, solely because of the participating employer failure, fail to be eligible for favorable tax treatment accorded to distributions from qualified plans (including that the distributions will be treated as eligible rollover distributions under section 402(c)(4)), except as E:\FR\FM\03JYP1.SGM 03JYP1 Federal Register / Vol. 84, No. 128 / Wednesday, July 3, 2019 / Proposed Rules provided in paragraph (g)(8)(ii)(C) of this section. (C) Exception for responsible parties. The IRS reserves the right to pursue appropriate remedies under the Code against any party (such as the owner of the participating employer) who is responsible for the participating employer failure. The IRS may pursue appropriate remedies against a responsible party even in the party’s capacity as a participant or beneficiary under the spun-off plan that is terminated in accordance with paragraph (g)(7) of this section (such as by not treating a plan distribution made to the responsible party as an eligible rollover distribution). (iii) Additional guidance. The Commissioner may provide additional guidance in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin, or in forms and instructions, that the Commissioner determines to be necessary or appropriate with respect to the requirements of this paragraph (g). (9) Applicability date. This paragraph (g) applies on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. Kirsten Wielobob, Deputy Commissioner for Services and Enforcement. Background [FR Doc. 2019–14123 Filed 7–2–19; 8:45 am] BILLING CODE 4830–01–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 53 [REG–106877–18] RIN 1545–BO75 Guidance on the Determination of the Section 4968 Excise Tax Applicable to Certain Private Colleges and Universities Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. AGENCY: This document contains proposed regulations for determining the excise tax applicable to the net investment income of certain private colleges and universities, as provided by the Tax Cuts and Jobs Act. These regulations affect applicable educational institutions and their related organizations. DATES: Written or electronic comments and requests for a public hearing must be received by October 1, 2019. jspears on DSK30JT082PROD with PROPOSALS SUMMARY: VerDate Sep<11>2014 17:07 Jul 02, 2019 Jkt 247001 Submit electronic submissions via the Federal eRulemaking Portal at http:// www.regulations.gov (indicate IRS and REG–106877–18) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment received to its public docket, whether submitted electronically or in hard copy. Send hard copy submissions to: CC:PA:LPD:PR (REG–106877–18), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–106877– 18), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Melinda Williams at (202) 317–6172 or Amber L. MacKenzie at (202) 317–4086; concerning submission of comments and request for hearing, Regina L. Johnson at (202) 317–6901 (not toll-free numbers). SUPPLEMENTARY INFORMATION: ADDRESSES: This document contains proposed regulations under section 4968 of the Internal Revenue Code (Code) to amend part 53 of the Excise Tax Regulations (26 CFR part 53). Section 4968 of the Code, added by section 13701 of the Tax Cuts and Jobs Act, Public Law 115–97, 131 Stat. 2054, 2167–68, (2017) (TCJA), imposes on each applicable educational institution, as defined in section 4968(b)(1), an excise tax equal to 1.4 percent of the institution’s net investment income, and, as described in section 4968(d), a portion of certain net investment income of certain related organizations, for the taxable year. Section 4968(b)(1) defines the term ‘‘applicable educational institution’’ as an eligible educational institution (as defined in section 25A(f)(2)) which during the preceding taxable year had at least 500 tuition-paying students, more than 50 percent of whom were located in the United States, is not a state college or university as described in the first sentence of section 511(a)(2)(B), and had assets (other than those assets used directly in carrying out the institution’s exempt purpose) the aggregate fair market value of which was at least $500,000 per student of the institution. PO 00000 Frm 00050 Fmt 4702 Sfmt 4702 31795 Section 4968(b)(2) provides that, for purposes of section 4968(b)(1), the number of students of an institution (including for purposes of determining the number of students at a particular location) shall be based on the daily average number of full-time students attending such institution (with parttime students taken into account on a full-time student equivalent basis). Section 4968(c) provides that, for purposes of section 4968, ‘‘net investment income’’ shall be determined under rules similar to the rules of section 4940(c). Section 4968(d)(1) provides that, for purposes of determining aggregate fair market value of an educational institution’s assets not used directly in carrying out its exempt purpose 1 and for purposes of determining an institution’s net investment income, the assets and net investment income of any related organization with respect to the institution shall be treated as assets and net investment income, respectively, of the educational institution, with two exceptions. First, no such amount shall be taken into account with respect to more than one educational institution. Second, unless such organization is controlled by such institution or is described in section 509(a)(3) (relating to supporting organizations) with respect to such institution for the taxable year, assets and net investment income which are not intended or available for the use or benefit of the educational institution shall not be taken into account. Section 4968(d)(2) provides that the term ‘‘related organization,’’ with respect to an educational institution, means (1) any organization which controls, or is controlled by, such institution; (2) is controlled by one or more persons that also control such institution; or (3) is a supported organization (as defined in section 509(f)(3)), or a supporting organization (as described in section 509(a)(3)), during the taxable year with respect to the educational institution. The Conference Report for the TCJA, H. Rept. 115–466, 115th Cong., 1st sess., December 15, 2017 (Conference Report), at 555, states that Congress intended that the Secretary of the Treasury promulgate regulations to carry out the intent of section 4968, including regulations that describe: (1) Assets that are used directly in carrying out an educational institution’s exempt 1 Section 4968(d)(1) erroneously cross references section 4968(b)(1)(C). The correct cross reference should be to section 4968(b)(1)(D). See Joint Committee on Taxation, ‘‘General Explanation of Public Law 115–97’’ (JCS–1–18), December 2018, at 290, n. 1357. E:\FR\FM\03JYP1.SGM 03JYP1

Agencies

[Federal Register Volume 84, Number 128 (Wednesday, July 3, 2019)]
[Proposed Rules]
[Pages 31777-31795]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-14123]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-121508-18]
RIN 1545-BO97


Multiple Employer Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document sets forth proposed regulations relating to the 
tax qualification of plans maintained by more than one employer. These 
plans, maintained pursuant to section 413(c) of the Internal Revenue 
Code (Code), are often referred to as multiple employer plans or MEPs. 
The proposed regulations would provide an exception, if certain 
requirements are met, to the application of the ``unified plan rule'' 
for a defined contribution MEP in the event of a failure by an employer 
participating in the plan to satisfy a qualification requirement or to 
provide information needed to determine compliance with a qualification 
requirement. These proposed regulations would affect MEPs, participants 
in MEPs (and their beneficiaries), employers participating in MEPs, and 
MEP plan administrators.

DATES: Comments and requests for a public hearing must be received by 
October 1, 2019.

ADDRESSES: Submit electronic submissions via the Federal eRulemaking 
Portal at www.regulations.gov (indicate IRS and REG-121508-18) by 
following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish for public availability any comment received to 
its public docket, whether submitted electronically or in hard copy. 
Send hard copy submissions to: CC:PA:LPD:PR (REG-121508-18), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
121508-18), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Pamela 
Kinard at (202) 317-6000 or Jamie Dvoretzky at (202) 317-4102; 
concerning submission of comments or to request a public hearing, email 
or call Regina Johnson at [email protected], (202) 
317-5190, or (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document sets forth proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 413(c) of the Internal 
Revenue Code (Code). Section 413(c) provides rules for the 
qualification of a plan maintained by more than one

[[Page 31778]]

employer.\1\ A section 413(c) plan is often referred to as a multiple 
employer plan (MEP).
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    \1\ Section 210 of the Employee Retirement Income Security Act 
of 1974, Public Law 93-406 (88 Stat. 829 (1974)), as amended 
(ERISA), also provides rules relating to plans maintained by more 
than one employer. Similar to section 413(c) of the Code, section 
210(a) of ERISA states that the minimum participation standards, 
minimum vesting standards, and benefit accrual requirements under 
sections 202, 203, and 204 of ERISA, respectively, shall be applied 
as if all employees of each of the employers were employed by a 
single employer. Under section 101 of Reorganization Plan No. 4 of 
1978 (43 FR 47713), the Secretary of the Treasury has interpretive 
jurisdiction over section 413 of the Code, as well as ERISA section 
210.
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    Final regulations under section 413 were published in the Federal 
Register on November 9, 1979, 44 FR 65061 (the final section 413 
regulations). The final section 413 regulations apply to multiple 
employer plans described in section 413(c) and to collectively 
bargained plans described in section 413(b) (plans that are maintained 
pursuant to certain collective-bargaining agreements between employee 
representatives and one or more employers).
    Pursuant to section 413(c) and the final section 413 regulations, 
all of the employers maintaining a MEP (participating employers) are 
treated as a single employer for purposes of certain section 401(a) 
qualification requirements. For example:
     Under section 413(c)(1) and Sec.  1.413-2(b), the rules 
for participation under section 410(a) and the regulations thereunder 
are applied as if all employees of each of the employers who maintain 
the plan are employed by a single employer;
     Under section 413(c)(2) and Sec.  1.413-2(c), in 
determining whether a MEP is, with respect to each participating 
employer, for the exclusive benefit of its employees (and their 
beneficiaries), all of the employees participating in the plan are 
treated as employees of each such employer; and
     Under section 413(c)(3) and Sec.  1.413-2(d), the minimum 
vesting standards under section 411 are applied as if all employers who 
maintain the plan constitute a single employer.
    Other rules are applied separately to each participating 
employer.\2\ For example, under Sec.  1.413-2(a)(3)(ii), the minimum 
coverage requirements of section 410(b) generally are applied to a MEP 
on an employer-by-employer basis.
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    \2\ Proposed rules at Sec.  1.413-2(e) and (f) (47 FR 54093) 
were issued in 1982. Proposed Sec.  1.413-2(e) would have provided 
that the minimum funding standard for a MEP is determined as if all 
participants in the plan were employed by a single employer, and 
proposed Sec.  1.413-2(f) would have provided rules relating to 
liability for the excise tax on a failure to meet the minimum 
funding standards. Because these rules were proposed in 1982, they 
do not reflect 1988 changes to section 413(c)(4) that were made by 
section 6058(a) of the Technical and Miscellaneous Revenue Act of 
1988, Public Law 100-647 (102 Stat. 3342) (TAMRA). As amended by 
TAMRA, section 413(c)(4) generally provides that in the case of a 
plan established after December 31, 1988, and in the case of a plan 
established before that date for which an election was made, each 
employer is treated as maintaining a separate plan for purposes of 
the minimum funding standards. The proposed rules at Sec.  1.413-
2(e) and (f) are outside the scope of these proposed regulations. 
Therefore, paragraphs (e) and (f) are ``Reserved'' for future 
rulemaking. The Treasury Department and the IRS note that taxpayers 
must take into account the statutory changes made after the issuance 
of the proposed regulations as of the effective dates of the 
relevant legislation.
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    A plan is not described in section 413(c) unless it is maintained 
by more than one employer \3\ and is a single plan under section 
414(l).\4\ See Sec. Sec.  1.413-2(a)(2)(i) and 1.413-1(a)(2). Under 
Sec.  1.414(l)-1(b), a plan is a single plan if and only if, on an 
ongoing basis, all of the plan assets are available to pay benefits to 
employees who are covered by the plan and their beneficiaries.
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    \3\ Section 1.413-2(a)(2), issued in 1979, provides that for 
purposes of determining the number of employers maintaining a plan, 
any employers described in section 414(b) that are members of a 
controlled group of corporations or any employers described in 
section 414(c) that are trades or businesses under common control, 
whichever is applicable, are treated as if those employers are a 
single employer. Because Sec.  1.413-2(a)(2) was issued in 1979, it 
does not address section 414(m), which was added in 1980 by section 
201(a) of the Miscellaneous Revenue Act of 1980, Public Law 96-605 
(94 Stat. 3521). Section 414(m) provides that all employers in an 
affiliated service group shall be treated as a single employer. 
Although amendments to Sec.  1.413-2(a)(2) are outside the scope of 
these proposed regulations, the Treasury Department and the IRS note 
that taxpayers must take into account the statutory changes made 
after the issuance of the proposed regulations as of the effective 
dates of the relevant legislation.
    \4\ On October 23, 2018 proposed Department of Labor regulations 
were published in the Federal Register (83 FR 53534) clarifying the 
circumstances in which employer groups or associations and 
professional employer organizations can constitute ``employers'' 
within the meaning of section 3(5) of ERISA for purposes of 
establishing or maintaining an individual account ``employee pension 
benefit plan'' within the meaning of ERISA section 3(2). Those 
proposed regulations state that an ``employee pension benefit plan'' 
under section 3(2) of ERISA must be established by an ``employer,'' 
defined in section 3(5) of ERISA to include an ``entity acting 
indirectly in the interest of an employer in relation to an employee 
benefit plan.'' The proposed Department of Labor regulations define 
the terms ``bona fide group or association of employers'' and ``bona 
fide professional employer organization'' and state that, with 
respect to a ``multiple employer defined contribution pension 
plan,'' these entities ``shall be deemed to be able to act in the 
interest of an employer'' provided that certain conditions are met. 
See proposed rules at 29 CFR 2510.3-55(a). The proposed Department 
of Labor regulations solicit comments on, but do not address, other 
types of entities that may be an employer under ERISA section 3(5).
---------------------------------------------------------------------------

    Under Sec.  1.413-2(a)(3)(iv) (sometimes referred to as the 
``unified plan rule''), the qualification of a MEP is determined with 
respect to all employers maintaining the MEP. Consequently, Sec.  
1.413-2(a)(3)(iv) provides 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 
MEP for all employers maintaining the plan.'' Section 1.416-1, Q&A G-2, 
includes a similar rule relating to the qualification of a MEP, 
providing that a failure by a MEP to satisfy section 416 with respect 
to employees of one participating employer means that all participating 
employers in the MEP are maintaining a plan that is not a qualified 
plan.\5\
---------------------------------------------------------------------------

    \5\ This rule is based on the unified plan rule in Sec.  1.413-
2(a)(3)(iv). Therefore, if a defined contribution MEP has an 
unresponsive employer that fails to satisfy section 416 and the 
defined contribution MEP meets the conditions for the exception to 
the unified plan rule in these proposed regulations, the defined 
contribution MEP will not be disqualified for the section 416 
failure. For further information, see the discussion in part II of 
the Explanation of Provisions section entitled Conditions for 
Application of Exception to the Unified Plan Rule. The rules in 
Sec.  1.416-1 are outside the scope of these proposed regulations, 
but the Treasury Department and the IRS intend to address the topic 
in a broader guidance project updating the regulations under section 
416.
---------------------------------------------------------------------------

    Section 1101(a) of the Pension Protection Act of 2006 (PPA '06), 
Public Law 109-280 (120 Stat. 780 (2006)), provides that the Secretary 
has full authority to establish and implement EPCRS \6\ (or any 
successor program) and any other employee plans correction policies, 
including the authority to waive income, excise, or other taxes to 
ensure that any tax, penalty, or sanction is not excessive and bears a 
reasonable relationship to the nature, extent, and severity of the 
failure. Section 1101(b) of PPA '06 provides that the Secretary shall 
continue to update and improve EPCRS (or any successor program), giving 
special attention to a number of items, including special concerns and 
circumstances that small employers face with respect to compliance and 
correction of compliance failures. EPCRS has been updated and expanded 
several times, most recently in Rev. Proc. 2019-19, 2019-19 I.R.B. 
1086. In addition, as provided for in Section 1101 of PPA '06, the 
Treasury Department and the IRS are authorized to establish and 
implement other employee plans correction policies, outside of EPCRS.
---------------------------------------------------------------------------

    \6\ The Employee Plans Compliance Resolution System (EPCRS) is a 
comprehensive system of correction programs for sponsors of certain 
retirement plans, including plans that are intended to satisfy the 
qualification requirements of section 401(a). EPCRS provides 
procedures for an employer to correct a plan's failure to satisfy an 
applicable qualification requirement so that the failure does not 
result in disqualification of the plan.
---------------------------------------------------------------------------

    On August 31, 2018, President Trump issued Executive Order 13847 
(83 FR

[[Page 31779]]

45321 (Sept. 6, 2018)), titled ``Strengthening Retirement Security in 
America'' (Executive Order). The Executive Order states that it shall 
be the policy of the Federal Government to expand access to workplace 
retirement plans for American workers and that enhancing workplace 
retirement plan coverage is critical to ensuring that American workers 
will be financially prepared to retire. The Executive Order also states 
that, ``[e]xpanding access to [MEPs], under which employees of 
different private-sector employers may participate in a single 
retirement plan, is an efficient way to reduce administrative costs of 
retirement plan establishment and maintenance and would encourage more 
plan formation and broader availability of workplace retirement plans, 
especially among small employers.'' \7\
---------------------------------------------------------------------------

    \7\ Id. at 45321.
---------------------------------------------------------------------------

    The Executive Order directs the Secretary of the Treasury to 
``consider proposing amendments to regulations or other guidance, 
consistent with applicable law and the policy set forth in . . . this 
order, regarding the circumstances under which a MEP may satisfy the 
tax qualification requirements . . . , including the consequences if 
one or more employers that sponsored or adopted the plan fails to take 
one or more actions necessary to meet those requirements.'' \8\ The 
Executive Order further directs the Secretary of the Treasury to 
consult with the Secretary of Labor in advance of issuing any such 
proposed guidance, and the Secretary of Labor to take steps to 
facilitate the implementation of any guidance, as appropriate and 
consistent with applicable law.
---------------------------------------------------------------------------

    \8\ Id. at 45322.
---------------------------------------------------------------------------

    Stakeholders have expressed concerns about the risk that the 
actions of one or more participating employers might disqualify a MEP 
\9\ and that some employers are reluctant to join MEPs without an 
exception to the unified plan rule. In particular, they have said that 
the cooperation of participating employers is needed for compliance and 
when a participating employer refuses to take the steps needed to 
maintain qualification, the entire plan is at risk of being 
disqualified. Stakeholders assert that without an exception to the 
unified plan rule, many employers perceive that the benefits of joining 
a MEP are outweighed by the risk of plan disqualification based on the 
actions of an uncooperative participating employer.
---------------------------------------------------------------------------

    \9\ See also, U.S. Gov't Accountability Office, GAO-12-665, 
``Federal Agencies Should Collect Data and Coordinate Oversight of 
Multiple Employer Plans'' (September 2012) (https://www.gao.gov/assets/650/648285.pdf) (identifying the unified plan rule as a 
potential problem for MEPs).
---------------------------------------------------------------------------

Explanation of Provisions

I. Overview

    In accordance with the Executive Order and the policy of expanding 
workplace retirement plan coverage, these proposed regulations, which 
were developed in consultation with the Secretary of Labor, would 
provide an exception to the unified plan rule for certain defined 
contribution MEPs. Under the proposed regulations, a defined 
contribution MEP would be eligible for the exception to the unified 
plan rule on account of certain qualification failures due to actions 
or inaction by a participating employer, if the conditions set forth in 
the proposed regulations are satisfied. The exception generally would 
be available if the participating employer in a MEP is responsible for 
a qualification failure that the employer is unable or unwilling to 
correct. It would also be available if the participating employer fails 
to comply with the section 413(c) plan administrator's request for 
information about a qualification failure that the section 413(c) plan 
administrator reasonably believes might exist. For the exception to the 
unified plan rule to apply, certain actions are required to be taken, 
including, in certain circumstances, a spinoff of the assets and 
account balances attributable to participants who are employees of such 
an employer to a separate plan and a termination of that plan.
    For purposes of applying the exception to the unified plan rule, 
under the proposed regulations: (1) A section 413(c) plan administrator 
is defined as the plan administrator of a MEP, determined under the 
rules of section 414(g); (2) a participating employer is defined as one 
of the employers maintaining a MEP; (3) an unresponsive participating 
employer is defined as a participating employer in a MEP that fails to 
comply with reasonable and timely requests from the section 413(c) plan 
administrator for information necessary 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; and (4) an 
employee is defined as a current or former employee of a participating 
employer.
    The exception to the unified plan rule would apply only in the case 
of certain types of failures to satisfy the qualification requirements, 
referred to in the proposed regulations as participating employer 
failures. A participating employer failure is defined as either a known 
qualification failure or a potential qualification failure. A known 
qualification failure is defined as a failure to satisfy a 
qualification requirement with respect to a MEP that is identified by 
the section 413(c) plan administrator and is attributable solely to an 
unresponsive participating employer. A potential qualification failure 
is a failure to satisfy a qualification requirement with respect to a 
MEP that the section 413(c) plan administrator reasonably believes 
might exist, but the section 413(c) plan administrator is unable to 
determine whether the qualification requirement is satisfied solely due 
to an unresponsive participating employer's failure to provide data, 
documents, or any other information necessary to determine whether the 
MEP is in compliance with the qualification requirement as it relates 
to the participating employer. For purposes of the definitions of known 
qualification failure and potential qualification failure, an 
unresponsive participating employer includes any employer that is 
treated as a single employer with that unresponsive participating 
employer under section 414(b), (c), (m), or (o).

II. Conditions for Application of Exception to Unified Plan Rule

    Under the exception to the unified plan rule in the proposed 
regulations, a defined contribution MEP would not be disqualified on 
account of a participating employer failure, provided that the 
following conditions are satisfied: (1) The MEP satisfies certain 
eligibility requirements (such as a requirement to have established 
practices and procedures to promote compliance and a requirement to 
adopt relevant plan language); (2) the section 413(c) plan 
administrator provides notice and an opportunity for the unresponsive 
participating employer to take remedial action with respect to the 
participating employer failure; (3) if the unresponsive participating 
employer fails to take appropriate remedial action with respect to the 
participating employer failure, the section 413(c) plan administrator 
implements a spinoff; and (4) the section 413(c) plan administrator 
complies with any information request that the IRS or a representative 
of the spun-off plan makes in connection with an IRS examination of the 
spun-off plan, including any information request

[[Page 31780]]

related to the participation of the unresponsive participating employer 
in the MEP for years prior to the spinoff. A spinoff may either be a 
spinoff that is initiated by the unresponsive participating employer 
and implemented by the section 413(c) plan administrator, or a spinoff-
termination implemented by the section 413(c) plan administrator 
pursuant to plan terms.

A. MEP's Eligibility for Exception to the Unified Plan Rule

    Under the proposed regulations, a threshold condition for the 
exception to the unified plan rule is that the MEP meet certain 
eligibility requirements. Specifically, the proposed regulations would 
require the section 413(c) plan administrator to have established 
practices and procedures (formal or informal) that are reasonably 
designed to promote and facilitate overall compliance with applicable 
Code requirements, including procedures for obtaining information from 
participating employers. In addition, the plan document would need to 
include language describing the procedures that would be followed to 
address participating employer failures, including the procedures that 
the section 413(c) plan administrator would follow if, after receiving 
notice from the section 413(c) plan administrator, an unresponsive 
participating employer fails to take appropriate remedial action or to 
initiate a spinoff from the MEP pursuant to the regulations.\10\ 
Finally, a MEP is not eligible for the exception to the unified plan 
rule if, as of the date that the first notice is provided to an 
unresponsive participating employer, the MEP is under examination. For 
a description of the first notice, see part II.B. of this Explanation 
of Provisions section, entitled Notice Requirements.
---------------------------------------------------------------------------

    \10\ Once final regulations are issued, the Treasury Department 
and the IRS intend to publish guidance in the Internal Revenue 
Bulletin setting forth model language that may be used for this 
purpose.
---------------------------------------------------------------------------

    For purposes of the proposed regulations, a plan is under 
examination if: (1) The plan is under an Employee Plans examination 
(that is, an examination of a Form 5500 series, ``Annual Return/Report 
of Employee Benefit Plan,'' or other examination by the Employee Plans 
Office of the Tax Exempt and Government Entities Division of the IRS 
(Employee Plans) (or any successor IRS office that has jurisdiction 
over qualified retirement plans)); (2) the plan is under investigation 
by the Criminal Investigation Division of the IRS (or its successor); 
or (3) the plan is treated as under an Employee Plans examination under 
special rules. Under these special rules, for example, a plan is under 
an Employee Plans examination if the section 413(c) plan administrator, 
or an authorized representative, has received verbal or written 
notification of an impending Employee Plans examination, or of an 
impending referral for an Employee Plans examination, or if a plan has 
been under an Employee Plans examination and the plan has an appeal 
pending with the IRS Office of Appeals (or its successor), or is in 
litigation with the IRS, regarding issues raised in the Employee Plans 
examination.
    This definition of the term under examination is similar to the 
definition in EPCRS. See Rev. Proc. 2019-19, section 5.08. However, 
unlike in EPCRS, a plan is not under examination for purposes of these 
proposed regulations merely because it is maintained by an employer 
that is under an Exempt Organizations examination (that is, an 
examination of a Form 990 series or other examination by the Exempt 
Organizations Office of the Tax Exempt and Government Entities Division 
of the IRS).

B. Notice Requirements

    The proposed regulations would require the section 413(c) plan 
administrator to provide up to three notices regarding a participating 
employer failure to the unresponsive participating employer; with the 
third notice, if applicable, also being provided to participants and 
beneficiaries and the Department of Labor.\11\
---------------------------------------------------------------------------

    \11\ If the notices relate to a potential qualification failure, 
and the potential qualification failure becomes a known 
qualification failure, then a new series of notices may be required.
---------------------------------------------------------------------------

    The first notice must describe the participating employer failure 
(or failures), as well as the remedial actions the unresponsive 
participating employer would need to take to remedy the failure and the 
employer's option to initiate a spinoff. The first notice must also 
explain the consequences under plan terms if the unresponsive 
participating employer neither takes appropriate remedial action with 
respect to the participating employer failure nor initiates a spinoff, 
including the possibility that a spinoff of the plan assets and account 
balances attributable to the employees of that employer into a separate 
single-employer plan would occur, followed by a termination of that 
plan (as discussed in this preamble under the heading Spinoff-
Termination).
    If, by the end of the 90-day period following the date the first 
notice is provided, the unresponsive participating employer neither 
takes appropriate remedial action nor initiates a spinoff, then no 
later than 30 days after the expiration of that 90-day period, the 
section 413(c) plan administrator must provide a second notice to that 
employer. The second notice must include the information required to be 
included in the first notice, and must also inform the employer that if 
it fails either to take appropriate remedial action or to initiate a 
spinoff within 90 days after the second notice then a notice describing 
the participating employer failure and the consequences of not 
correcting that failure will be provided to participants who are 
employees of the unresponsive participating employer (and their 
beneficiaries) and to the Department of Labor.
    If, by the end of the 90-day period following the date the second 
notice is provided, the unresponsive participating employer neither 
takes appropriate remedial action nor initiates a spinoff, then no 
later than 30 days after the expiration of that 90-day period, the 
section 413(c) plan administrator must provide a third notice to the 
unresponsive participating employer, to participants who are employees 
of that employer (and their beneficiaries), and to the Department of 
Labor.\12\ The third notice must include the information required to be 
included in the first notice, the deadline for employer action, and an 
explanation of any adverse consequences to participants in the event 
that a spinoff-termination occurs, and state that the notice is being 
provided to participants who are employees of the unresponsive 
participating employer (and their beneficiaries) and to the Department 
of Labor.
---------------------------------------------------------------------------

    \12\ The notice to the Department of Labor should be mailed to 
the Employee Benefits Security Administration's Office of 
Enforcement (or its successor office). The Office of Enforcement is 
currently located at 200 Constitution Ave. NW, Suite 600, 
Washington, DC 20210.
---------------------------------------------------------------------------

C. Actions by Unresponsive Participating Employer

    The proposed regulations provide that after the unresponsive 
participating employer has received notice of the participating 
employer failure, the employer has the opportunity to either take 
appropriate remedial action or initiate a spinoff. The final deadline 
for an unresponsive participating employer to take one of these actions 
is 90 days after the third notice is provided. The consequences of the 
employer's failure to meet this deadline are described in this 
Explanation of Provisions section

[[Page 31781]]

under part II.E., entitled Spinoff-Termination.
    The proposed regulations provide that an unresponsive participating 
employer takes appropriate remedial action with respect to a potential 
qualification failure if the employer provides data, documents, or any 
other information necessary for the section 413(c) plan administrator 
to determine whether a qualification failure exists. If (1) the 
unresponsive participating employer provides this information, (2) the 
section 413(c) plan administrator determines that, based on this 
information, a qualification failure exists that is attributable solely 
to that employer, and (3) the participating employer fails to comply 
with reasonable and timely requests from the section 413(c) plan 
administrator to take actions that are needed to correct that 
qualification failure, then the qualification failure becomes a known 
qualification failure. In that case, the MEP would be eligible for the 
exception to the unified plan rule with respect to the known 
qualification failure by satisfying the conditions with respect to that 
known qualification failure, taking into account the rules described in 
this Explanation of Provisions section under part II.D., entitled 
Actions by Section 413(c) Plan Administrator Relating to Remedial 
Action or Employer-Initiated Spinoff. An unresponsive participating 
employer takes appropriate remedial action with respect to a known 
qualification failure if the employer takes action, such as making 
corrective contributions, that corrects, or enables the section 413(c) 
plan administrator to correct, the known qualification failure.
    As an alternative to taking appropriate remedial action with 
respect to a potential or a known qualification failure, an 
unresponsive participating employer may, after receiving notice of the 
participating employer failure, initiate a spinoff by directing the 
section 413(c) plan administrator to spin off plan assets and account 
balances held on behalf of employees of that employer to a separate 
single-employer plan established and maintained by that employer in a 
manner consistent with plan terms. In that case, the section 413(c) 
plan administrator must implement that spinoff, as described in this 
Explanation of Provisions section under part II.D., entitled Actions by 
Section 413(c) Plan Administrator Relating to Remedial Action or 
Employer-Initiated Spinoff.

D. Actions by Section 413(c) Plan Administrator Relating to Remedial 
Action or Employer-Initiated Spinoff

    For purposes of applying the conditions of the exception to the 
unified plan rule to a potential qualification failure that becomes a 
known qualification failure, actions taken (including notices provided) 
when the failure was a potential qualification failure are not taken 
into account. For example, a notice that the section 413(c) plan 
administrator provided in connection with the potential qualification 
failure would not satisfy the notice requirements for the known 
qualification failure. However, in determining whether the MEP is under 
examination as of the date of the first notice describing the known 
qualification failure, the section 413(c) plan administrator will be 
treated as providing that notice on the date the first notice was 
provided with respect to the related potential qualification failure, 
but only if the following conditions are satisfied: (1) After 
determining that a qualification failure exists, the section 413(c) 
plan administrator makes a reasonable and timely request to the 
participating employer to take actions that are needed to correct the 
failure, and (2) as soon as reasonably practicable after the 
participating employer fails to respond to that request, the section 
413(c) plan administrator provides the first notice with respect to the 
known qualification failure.
    The Treasury Department and the IRS anticipate revising EPCRS to 
provide that, if a 413(c) plan administrator provides the first notice 
with respect to a participating employer failure under a MEP at a time 
that the plan is not under examination, then the MEP will not be 
considered to be under examination for purposes of determining whether 
the participating employer failure is eligible to be corrected under 
the Self Correction Program or Voluntary Correction Program components 
of EPCRS. It is anticipated that this application of the term under 
examination under EPCRS will be conditioned on the 413(c) plan 
administrator complying with applicable conditions for the exception to 
the unified plan rule and, for a known qualification failure with 
respect to which the unresponsive participating employer takes 
appropriate remedial action, taking any remaining action necessary to 
correct the qualification failure as soon as reasonably practicable.
    If an unresponsive participating employer takes appropriate 
remedial action with respect to a known qualification failure, then the 
section 413(c) plan administrator must take any remaining action 
necessary to correct the qualification failure. If the section 413(c) 
plan administrator fails to take any remaining action necessary to 
correct the known qualification failure, the exception to the unified 
plan rule will not apply and the section 413(c) plan may be 
disqualified on account of that failure.
    If, instead of taking appropriate remedial action (as described in 
part II.C. of this Explanation of Provisions, entitled Actions by 
Unresponsive Participating Employer), an unresponsive participating 
employer initiates a spinoff of plan assets and account balances held 
on behalf of employees of that employer to a separate single-employer 
plan established and maintained by that employer, the section 413(c) 
plan administrator must implement and complete a spinoff of the plan 
assets and account balances held on behalf of the employees of the 
employer that are attributable to employment by the employer within 180 
days of the date on which it was initiated. The section 413(c) plan 
administrator must also report the spinoff to the IRS (in the manner 
prescribed by the IRS in forms, instructions, and other guidance).

E. Spinoff-Termination

    If, after the first notice of a participating employer failure is 
provided, the unresponsive participating employer neither takes 
appropriate remedial action nor initiates a spinoff by the date that is 
90 days after the third notice is provided, then, for the exception to 
the unified plan rule to apply, there must be a spinoff of the plan 
assets and account balances held on behalf of employees of the 
unresponsive participating employer that are attributable to their 
employment with that employer to a separate plan, followed by a 
termination of that plan. The spinoff-termination must be pursuant to 
plan terms and in accordance with the proposed regulations. The MEP 
will satisfy this condition, if, as soon as reasonably practicable 
after the deadline for action by the unresponsive participating 
employer, the section 413(c) plan administrator: (1) Provides notice of 
the spinoff-termination to participants who are employees of the 
unresponsive participating employer (and their beneficiaries); (2) 
stops accepting contributions from the unresponsive participating 
employer; (3) implements a spinoff, in accordance with the transfer 
requirements of section 414(l) and the anti-cutback requirements of

[[Page 31782]]

section 411(d)(6), of the plan assets and account balances held on 
behalf of employees of the unresponsive participating employer that are 
attributable to their employment by that employer to a separate single-
employer plan and trust that has the same plan administrator, trustee, 
and substantive plan terms as the MEP; and (4) terminates the spun-off 
plan and distributes assets of the spun-off plan to plan participants 
and beneficiaries as soon as reasonably practicable after the plan 
termination date.\13\
---------------------------------------------------------------------------

    \13\ The Pension Benefit Guaranty Corporation's Missing 
Participants Program provides a mechanism for distributing assets to 
plan participants in a terminating plan. See 29 CFR 4050.201 through 
4050.207. Use of the Pension Benefit Guaranty Corporation's Missing 
Participants Program is optional for defined contribution plans. 
Under the program, the Pension Benefit Guaranty Corporation locates 
participants and beneficiaries who were missing when their plans 
terminated. When found, depending on arrangements made by the plan, 
the Pension Benefit Guaranty Corporation either provides the benefit 
or information about where the participant's account is being held.
---------------------------------------------------------------------------

    In terminating the spun-off plan, the section 413(c) plan 
administrator must:
     Reasonably determine whether, and to what extent, the 
survivor annuity requirements of sections 401(a)(11) and 417 apply to 
any benefit payable under the plan and take reasonable steps to comply 
with those requirements (if applicable);
     Provide each participant and beneficiary with a 
nonforfeitable right to his or her accrued benefits as of the date of 
plan termination, subject to income, expenses, gains, and losses 
between that date and the date of distribution; and
     Notify the participants and beneficiaries of their rights 
under section 402(f).
    In providing notice of the spinoff-termination to participants (and 
their beneficiaries), the section 413(c) plan administrator must 
provide information relating to the spinoff-termination to participants 
who are employees of the unresponsive participating employer (and their 
beneficiaries), including the following: (1) Identification of the MEP 
and contact information for the section 413(c) plan administrator; (2) 
the effective date of the spinoff-termination; (3) a statement that no 
more contributions will be made to the MEP; (4) a statement that as 
soon as practicable after the spinoff-termination, participants and 
beneficiaries will receive a distribution from the spun-off plan; and 
(5) a statement that before the distribution occurs, participants and 
beneficiaries will receive additional information about their options 
with respect to that distribution.
    The section 413(c) plan administrator must report the spinoff-
termination to the IRS (in the manner prescribed by the IRS in forms, 
instructions, and other guidance).

III. Other Rules

A. Form of Notices

    Any notices required to be provided under the proposed regulations 
may be provided in writing or in electronic form. For notices provided 
to participants and beneficiaries, see generally Sec.  1.401(a)-21 for 
rules permitting the use of electronic media to provide applicable 
notices to recipients with respect to retirement plans.

B. Qualification of Spun-Off Plan

    In the case of any plan that is spun off in accordance with the 
proposed regulations, any participating employer failure that would 
have affected the qualification of a MEP, but for the application of 
the exception to the unified plan rule, will be a qualification failure 
with respect to the spun-off plan. In the case of an employer-initiated 
spinoff, see EPCRS (or its successors) for rules relating to correcting 
qualification failures.
    Under the authority provided by section 1101 of PPA '06, the 
proposed regulations provide that distributions made from a spun-off 
plan that is terminated in accordance with these regulations would not, 
solely because of the participating employer failure, fail to be 
eligible for favorable tax treatment accorded to distributions from 
qualified plans (including that the distributions will be treated as 
eligible rollover distributions under section 402(c)(4)), except as 
provided in the next paragraph. Under section 1101 of PPA '06, Congress 
gave the Secretary broad authority to establish employee plans 
correction policies. In developing a correction policy for MEPs, it is 
appropriate to treat distributions to rank-and-file participants 
following a spinoff-termination as eligible for tax-favored treatment 
in order to ensure that the tax or sanction is not excessive and bears 
a reasonable relationship to the nature of the failure.\14\
---------------------------------------------------------------------------

    \14\ In addition, a participating employer failure could either 
be a known qualification failure or a potential qualification 
failure. Treating distributions from a spun-off and terminated plan 
relating to a potential qualification failure as ineligible for tax-
favored treatment does not bear a reasonable relationship to the 
nature of the failure.
---------------------------------------------------------------------------

    The regulations also provide that, notwithstanding the general rule 
regarding favorable tax treatment for distributions from a plan 
following spinoff-termination, the IRS reserves the right to pursue 
appropriate remedies under the Code against any party (such as the 
owner of the participating employer) who is responsible for the 
participating employer failure resulting in the spinoff-termination. 
The IRS may pursue appropriate remedies against a responsible party 
even in the party's capacity as a participant or beneficiary under the 
plan that is spun off and terminated (such as by not treating a plan 
distribution made to the responsible party as an eligible rollover 
distribution). This is similar to the approach adopted in EPCRS with 
respect to terminating orphan plans. See Rev. Proc. 2019-19, section 
6.02(2)(e)(i).
    The proposed regulations also provide that the Commissioner may 
provide additional guidance, such as in revenue rulings, notices, or 
other guidance published in the Internal Revenue Bulletin, or in forms 
and instructions, that the Commissioner determines to be necessary or 
appropriate with respect to the requirements of the regulations.

Proposed Applicability Date

    These regulations generally are proposed to apply on or after the 
date of publication of the Treasury decision adopting these rules as 
final regulations in the Federal Register. Until regulations finalizing 
these proposed regulations are issued, taxpayers may not rely on the 
rules set forth in these proposed regulations.

Availability of IRS Documents

    For copies of recently issued revenue procedures, revenue rulings, 
notices and other guidance published in the Internal Revenue Bulletin, 
please visit the IRS website at www.irs.gov or contact the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402.

Special Analyses

I. Regulatory Impact Analysis

    Executive Orders 13771, 13563, and 12866 direct agencies to assess 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits, including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity. Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, reducing costs, harmonizing rules, and promoting flexibility. 
The Executive Order 13771 designation for any final rule resulting from 
the proposed regulation will be informed by comments received. The 
preliminary Executive Order 13771 designation for this proposed rule is 
deregulatory.
    The proposed regulation has been designated by the Office of 
Information

[[Page 31783]]

and Regulatory Affairs (OIRA) as significant under Executive Order 
12866 pursuant to the Memorandum of Agreement (MOA, April 11, 2018) 
between the Treasury Department and the Office of Management and Budget 
regarding review of tax regulations.

1. Introduction and Need for Regulation

    The U.S. retirement system is comprised of three main pillars of 
savings: Social Security, workplace pension plans, and individual 
savings. Yet, roughly 30% of American workers lack access to an 
employer-sponsored savings vehicle (See Table 1 in Section 7 of this 
Regulatory Impact Analysis, entitled Tables). 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. This 
would lead to larger firms enjoying a competitive advantage in labor 
markets. One factor that may prevent small firms from offering a plan 
includes the high administrative costs associated with compliance. In 
order to receive preferential tax treatment, a plan must meet certain 
criteria specified in the Code and ensuring that those requirements are 
met can be costly. Furthermore, the costs associated with managing 
funds in retirement plans tends to be higher for a smaller pool of 
assets (See Table 3 in Section 7, later), which is more likely to be 
the case for smaller firms with fewer employees.
    One solution that has developed for reducing these administrative 
and asset management costs is the MEP, through which different 
employers can form a single plan to take advantage of economies of 
scale. Under the current regulations under section 413(c), however, the 
unified plan rule creates a situation whereby should one employer fail 
to comply with the qualification requirements, then the preferential 
tax status for a qualified plan is lost for the entire MEP. The 
proposed regulation provides an exception to the unified plan rule for 
certain defined contribution MEPs, permitting compliant participating 
employers to continue to maintain a qualified plan if certain 
conditions are satisfied. Reducing the perceived risk that a MEP will 
be disqualified could lead to more small employers to adopt these 
plans.

2. Affected Entities

    Based on the latest available data, as shown in Table 2, there are 
about 4,630 defined contribution MEPs with approximately 4.4 million 
total participants, 3.7 million of whom are active participants. 
Defined contribution MEPs hold about $181 billion in assets. Fifty-six 
percent of defined contribution MEP participants are in MEPs with 
10,000 or more participants, and 98% are in MEPs with 100 or more 
participants. As noted earlier, about 30% of employees do not have 
access to a retirement savings plan through their employer. The 
proposed regulation, which is limited to defined contribution MEPs, may 
encourage both the creation of new defined contribution MEPs and the 
expansion of existing defined contribution MEPs. As a result of the 
proposed regulation, the cost of providing some existing employer-
sponsored retirement plans could fall, and some employees would gain 
access to employer-sponsored retirement plans.

3. Baseline

    The analysis in this section compares the proposed regulation to a 
no-action baseline reflecting anticipated Federal income tax-related 
behavior in the absence of these proposed regulations.

4. Benefits

a. Expanded Access to Coverage
    Generally, employees rarely choose to save for retirement outside 
of the workplace, despite having options to save in tax-favored savings 
vehicles on their own; only about 10% of households without access to 
an employer-sponsored plan made contributions to traditional or Roth 
IRAs for 2014.\15\ Thus, the availability of workplace retirement plans 
is a significant factor affecting whether individuals save for their 
retirement. Yet, despite the advantages of workplace retirements plans, 
access to such plans for employees of small businesses is relatively 
low.
---------------------------------------------------------------------------

    \15\ Based on tabulations from the Office of Tax Analysis' 
microsimulation model.
---------------------------------------------------------------------------

    The MEP structure may address significant concerns from employers 
about the costs to set up and administer retirement benefit plans. In 
order to participate in a MEP, employers would simply execute a 
participation agreement or similar instrument setting forth the rights 
and obligations of the MEP and participating employers. Each 
participating employer would then be participating in a single plan, 
rather than sponsoring its own separate plan. The individual employers 
would not be directly responsible for the MEP's overall compliance with 
reporting and disclosure obligations. Accordingly, the MEP structure 
may address small employers' concerns regarding the cost associated 
with fiduciary liability of sponsoring a retirement plan by effectively 
transferring much of the legal risks and responsibilities to 
professional fiduciaries who would be responsible for managing plan 
assets and selecting investment menu options, among other things. 
Participating employers' continuing involvement in the day-to-day 
operations and administration of their MEP generally would be limited 
to enrolling employees and forwarding employee and employer 
contributions to the plan. Thus, participating employers would keep 
more of their day-to-day focus on managing their businesses, rather 
than their retirement plans.
    The proposed regulation would reduce the risk to small businesses 
participating in a MEP. Currently, if one participating employer fails 
to meet the qualification requirements in the Code for preferential tax 
treatment, then the entire plan may be disqualified, and employers 
participating in a MEP and their employees would lose the tax benefits 
of participating in a qualified retirement plan (deduction for 
contributions, exclusion of investment returns, deferred income 
recognition for employees). As a result, the current rule imposes an 
undue burden on employers who satisfied their requirements but happened 
to have a bad actor among their plan's other employers. The proposed 
regulation minimizes this burden by allowing noncompliant or 
unresponsive participating employers to be dealt with separately while 
the other participating employers maintain a qualified plan. Thus, the 
risk taken on by any one participating employer when joining a MEP is 
reduced as the employer no longer needs to consider the actions of 
other participating employers over which the employer exerts no 
control. The proposed regulation may therefore encourage formation of 
additional MEPs, as well as expanded participation in existing MEPs.
    Because more plan formation and broader availability of such plans 
is likely to occur due to the proposed regulations, especially among 
small employers, the Treasury Department has determined that the 
proposed regulation would increase access to retirement plans for many 
American workers. However, the Treasury Department does not have 
sufficient data to determine precisely the likely extent of increased 
participation by small employers under the proposed regulation.
b. Reduced Fees and Administration Savings
    Most MEPs could be expected to benefit from scale advantages that 
small businesses do not currently enjoy and to pass on some of the 
savings to participating employers and employees. Grouping small 
employers together into

[[Page 31784]]

a MEP may facilitate savings through administrative efficiencies 
(economies of scale) and potentially through price negotiation (market 
power).
    As scale increases, MEPs would spread fixed costs over a larger 
pool of participating employers and employee participants. Scale 
efficiencies can be very large with respect to asset management and may 
be smaller, but still meaningful, with respect to recordkeeping. Also, 
as scale increases, so does the negotiating power of MEPs. Negotiating 
power matters when competition among financial services providers is 
less than perfect, and they can command greater profits than in an 
environment with perfect competition. Very large plans may exercise 
their own market power to negotiate lower prices, translating into 
savings for member employees and employee participants.
    Sometimes, scale efficiencies would not translate into savings for 
small employer members and their employee participants because 
regulatory requirements applicable to large MEPs may be more stringent 
than those applicable to most separate small plans. For example, some 
small plans are exempt from annual reporting requirements, and many 
others are subject to more streamlined reporting requirements than 
larger plans. But in most cases, the savings from the scale efficiency 
of MEPs would be greater than the savings from scale efficiencies that 
other providers of bundled financial services may offer to small 
employers.
    First, the legal status of MEPs as a single large plan may 
streamline certain regulatory burdens under the Code and title I of 
ERISA. For example, a MEP can file a single annual return/report and 
obtain a single bond in lieu of the multiple reports and bonds 
necessary when other providers of bundled financial services administer 
many separate plans.
    Second, relative to separate small employer plans, a MEP operating 
as a large single plan would likely secure substantially lower prices 
from financial services companies. Asset managers commonly offer 
proportionately lower prices, relative to assets invested, to larger 
investors, under so-called tiered pricing practices. For example, 
investment companies often offer lower-priced mutual fund share classes 
to customers whose investments in a fund surpass specified break 
points. These lower prices may reflect scale economies in any or all 
aspects of administering larger accounts, such as marketing, 
distribution, asset management, recordkeeping, and transaction 
processing. MEPs that are larger would likely qualify for lower pricing 
compared with separate plans of small employers. MEP participants that 
benefit from lower asset-based fees would enjoy superior investment 
returns net of fees.
    The availability and magnitude of scale efficiencies may be 
different with respect to different retirement plan services. For 
example, asset management generally enjoys very large-scale 
efficiencies. Investors of all kinds generally benefit by investing in 
large co-mingled pools. Even within large pools, however, small 
investors often pay higher fees than larger ones. Investors with more 
assets to invest may pay lower costs when using mutual funds as 
investment vehicles.
    As with asset management, scale efficiencies often are available 
with respect to other plan services. For example, the marginal costs of 
services such as marketing and distribution, account administration, 
and transaction processing often decrease as customer size increases. 
Similarly, small pension plans sometimes incur high distribution costs, 
reflecting commissions paid to agents and brokers who sell investment 
products to plans. MEPs, as large customers, may enjoy scale 
efficiencies in the acquisition of such services. It is also possible, 
however, that the cost to MEPs of servicing many small employer-members 
may diminish or even offset such efficiencies. Stated differently, 
MEPs' scale efficiencies may not always exceed the scale efficiencies 
from other providers of bundled financial services used by small 
employers that sponsor separate plans. In addition, even if MEPs are 
able to enjoy scale efficiencies greater than the scale efficiencies 
available from other providers of bundled financial services, the scale 
efficiencies of MEPs catering to small businesses would still likely be 
smaller than the scale efficiencies enjoyed by very large single-
employer plans.
    By reducing the risk to employers of participating in a MEP, the 
proposed regulation would allow more MEPs to be established and to 
pursue scale advantages. It would also extend scale advantages to some 
existing MEPs that otherwise might have been too small to achieve them 
and to small employers that absent the proposed regulation would have 
offered separate plans (or no plans), but that under this proposed 
regulation may participate in a MEP.
    While MEP's scale advantages may be smaller than the scale 
advantages enjoyed by very large single-employer plans, it nonetheless 
is illuminating to consider the savings historically enjoyed by the 
latter. For an illustration of how much investment fees vary based on 
the amount of assets in a 401(k) plan, see Table 3 in Section 7 of this 
Regulatory Impact Analysis entitled Tables. The table focuses on mutual 
funds, which are the most common investment vehicle in 401(k) plans, 
and shows that the average expense ratio is inversely related to plan 
size. There are some important caveats to interpreting Table 3. The 
first is that it does not include data for most of the smallest plans 
since plans with fewer than 100 participants generally are not required 
to submit audited financial statements with their Form 5500. The second 
is that there is variation across plans in whether and to what degree 
the cost of recordkeeping is included in the expense ratios.
    Another method for comparing plan size advantages is a broader 
measure called ``total plan cost'' calculated by BrightScope that 
includes fees reported on the audited Form 5500. As Table 4 shows, 
total plan cost yields generally similar results about the cost 
differences facing small and large plans. Deloitte Consulting LLP, for 
the Investment Company Institute, conducted a survey of 361 defined 
contributions plans.\16\ The study calculates the ``all-in'' fee that 
is comparable across plans, and included both administrative and 
investment fees paid by the plan and participants. Generally, small 
plans with 10 or fewer participants are paying approximately 50 basis 
points more than plans with more than 1,000 participants. Generally, 
small plans with 10 or fewer participants are paying about 90 basis 
points more than large plans with more than 50,000 participants.
---------------------------------------------------------------------------

    \16\ Deloitte Consulting and Investment Company Institute, 
``Inside the Structure of Defined Contribution/401(k) Plan Fees, 
2013: A Study Assessing the Mechanics of the `All-in' Fee'' (Aug. 
2014) (available at https://www2.deloitte.com/content/dam/Deloitte/us/Documents/human-capital/us-cons-401k-fee-study-2013-082014.pdf).
---------------------------------------------------------------------------

    The research studies described under this heading, Reduced Fees and 
Administrative Costs, show that small plans and their participants 
generally pay higher fees than large plans and their participants. 
Because this rule would give many small employers the incentive to join 
a MEP, some of which may become very large plans, many of these 
employers would likely incur lower fees. Many employers that are not 
currently offering any retirement plan may join a MEP, leading their 
employees to save for retirement. Many employers already sponsoring a 
retirement plan might decide to join a MEP instead. If there are lower 
fees in the MEPs than in their previous plans,

[[Page 31785]]

those lower fees would translate into higher savings.
c. Reduced Reporting and Audit Costs
    The potential for MEPs to enjoy reporting cost savings merits 
separate attention because this potential is shaped not only by 
economic forces, but also the reporting requirements applicable to 
different plans. On the one hand, a MEP, as a single ERISA plan, can 
file a single report and conduct a single audit, while separate plans 
may be required to file separate reports and conduct separate audits. 
On the other hand, a MEP, as a large plan generally is subject to more 
stringent reporting and audit requirements than a small plan, which 
likely files no or streamlined reports and undergoes no audits. With 
respect to reporting and audits, MEPs may offer more savings to medium-
sized employers (with 100 or more retirement plan participants) that 
are already subject to more stringent reporting and audit requirements 
than to small employers. Small employers that otherwise would have 
fallen outside of reporting and audit requirements sometimes would 
incur slightly higher costs by joining MEPs. This cost increase may 
still be offset by benefits described in other sections. From a broader 
point of view, if auditing becomes more prevalent because small 
employers join MEPs, that would lead to more and better quality data 
that would improve security for employers, participants and 
beneficiaries.
    Sponsors of ERISA-covered retirement plans generally must file a 
Form 5500 annually, with all required schedules and attachments. The 
cost burden incurred to satisfy the Form 5500 related reporting 
requirements varies by plan type, size and complexity. Analyzing the 
2016 Form 5500 filings, the Department of Labor estimates that the 
average cost to file the Form 5500 is as follows: $276 per filer for 
small (generally less than 100 plan participants) single-employer 
defined contribution plans eligible for Form 5500-SF; $437 per filer 
for small single-employer defined contribution plans not eligible to 
file Form 5500-SF; and $1,686 per filer for larger (generally 100 
participants or more) single-employer defined contribution plans, plus 
the cost of an audit.
    Additional schedules and reporting may be required for large and 
complex plans. For example, large retirement plans are required to 
attach auditor's reports to their Form 5500. Most small plans are not 
required to obtain or attach such reports. Hiring an auditor and 
obtaining an audit report can be costly for plans, and audit fees may 
increase as plans get larger or if plans are more complex. A recent 
report states that the fee to audit a 401(k) plan ranges between $6,500 
and $13,000.\17\
---------------------------------------------------------------------------

    \17\ See https://www.thayerpartnersllc.com/blog/the-hidden-costs-of-a-401k-audit. However, in a comment letter received by the 
Department of Labor in response to its October 23, 2018 (83 FR 
53534), proposed rule clarifying the circumstances under which an 
employer group or association or PEO may sponsor a MEP, an 
association reported that the cost of its MEP audit was $24,000. See 
comment letter #6 Employers Association of New Jersey, EANJ at 
https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB88/00006.pdf.
---------------------------------------------------------------------------

    If an employer joins a MEP, it may save some costs associated with 
filing Form 5500 and fulfilling audit requirements to the extent the 
MEP is considered a single plan under ERISA. Thus, one Form 5500 and 
audit report would satisfy the reporting requirements, and each 
participating employer would not need to file its own, separate Form 
5500 and, for large plans or those few small plans that do not meet the 
small plan audit waiver, an audit report. Assuming reporting costs are 
shared by participating employers within a MEP, an employer joining a 
MEP can save virtually all the reporting costs discussed above. Large 
plans may enjoy even higher cost savings if audit costs are taken into 
account.
    It is less clear whether the self-employed would experience similar 
reporting cost savings by joining a MEP. The Department of Labor 
estimated these potential cost savings by comparing the reporting costs 
of an employer that participates in a MEP rather than sponsoring its 
own plan. However, several retirement savings options are already 
available for self-employed persons, and most have minimal or no 
reporting requirements. For example, both SEP IRA and SIMPLE IRA plans 
are available for small employers and the self-employed and neither 
option requires Form 5500 filings. Solo 401(k) plans are also available 
for self-employed persons, and they may be exempt from the Form 5500-EZ 
reporting requirement if plan assets are less than $250,000. Thus, if 
self-employed individuals join a MEP, they would be unlikely to realize 
reporting cost savings. In fact, it is possible that their reporting 
costs may slightly increase, because the self-employed would share 
reporting costs with other MEP participating employers that they would 
otherwise not incur.\18\
---------------------------------------------------------------------------

    \18\ However, self-employed participants, like all participants 
in small plans, would benefit from these enhanced audit and 
reporting requirements.
---------------------------------------------------------------------------

d. Reduced Bonding Costs
    The potential for bonding cost savings in MEPs merits separate 
attention. As noted above, ERISA section 412 and related regulations 
generally require every fiduciary of an employee benefit plan and every 
person who handles funds or other property of such a plan to be bonded. 
ERISA's bonding requirements are intended to protect employee benefit 
plans from risk of loss due to fraud or dishonesty on the part of 
persons who handle plan funds or other property, generally referred to 
as plan officials. A plan official must be bonded for at least 10 
percent of the amount of funds he or she handles, subject to a minimum 
bond amount of $1,000 per plan with respect to which the plan official 
has handling functions. In most instances, the maximum bond amount that 
can be required under ERISA with respect to any one plan official is 
$500,000 per plan; however, the maximum required bond amount is 
$1,000,000 for plan officials of plans that hold employer 
securities.\19\
---------------------------------------------------------------------------

    \19\ See DOL Field Assistance Bulletin 2008-04, https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2008-04.
---------------------------------------------------------------------------

    Under the proposed regulation, MEPs generally might enjoy lower 
bonding costs than would an otherwise equivalent collection of small, 
separate plans, for two reasons. First, it might be less expensive to 
buy one bond covering a large number of individuals who handle plan 
funds than a large number of bonds covering the same individuals 
separately or in small, more numerous groups. Second, the number of 
people handling plan funds and therefore subject to ERISA's bonding 
requirement in the context of a MEP may be smaller than in the context 
of an otherwise equivalent collection of smaller, separate plans.
e. Increased Retirement Savings
    The various effects of this rule, if finalized, may lead in 
aggregate to increased retirement savings. As discussed above, many 
employees would likely go from not having any access to a retirement 
plan to having access through a MEP. This has the potential to result 
in an increase in retirement savings, on average, for this group of 
employees. While some employees may choose not to participate, surveys 
indicate that a large number would participate. For a defined 
contribution pension plan, about 73 percent of all employees with 
access

[[Page 31786]]

participate in the plan.\20\ Among employees whose salary tends to be 
in the lowest 10 percent of the salary range, this figure is about 40 
percent.\21\ One reason that these take-up rates are relatively high is 
that many plans use automatic enrollment to enroll newly hired 
employees, as well as, sometimes existing employees. Automatic 
enrollment is particularly prevalent among large plans; in 2017 about 
74 percent of plans with 1,000-4,999 participants used automatic 
enrollment, while only about 27 percent of plans with 1-49 participants 
did.\22\
---------------------------------------------------------------------------

    \20\ U.S. Bureau of Labor Statistics, National Compensation 
Survey, Employee Benefits in the U.S. (March 2018).
    \21\ Id.
    \22\ Plan Sponsor Council of America, ``61st Annual Survey of 
Profit Sharing and 401(k) Plans, Reflecting 2017 Plan Experience'' 
(2018), Table 111.
---------------------------------------------------------------------------

    Some workers may be saving in an IRA, either in an employer-
sponsored IRA, payroll deduction IRA, or on their own. If they begin 
participating in a MEP 401(k), they would have the opportunity to take 
advantage of higher contribution limits, and some individuals may begin 
receiving employer contributions when participating in a MEP when they 
did not previously.
    In general, MEPs may offer participants a way to save for 
retirement with lower overall costs. In particular, the fees are likely 
to be lower than in most small plans and in retail IRAs. The savings in 
fees would result in higher investment returns and thus higher 
retirement savings.
f. Increased Labor Market Efficiency
    The increased prevalence of MEPs would allow small employers the 
opportunity to offer retirement benefits that are comparable to what 
large employers provide. Since employees value retirement benefits, 
this development would tend to shift talented employees toward small 
businesses. Moreover, certain groups such as secondary earners in high 
income families who have high marginal tax rates, and therefore larger 
benefits from tax-preferred savings, might now be more inclined to work 
for small businesses as those businesses might now offer a retirement 
plan. Such shifts would make small businesses more competitive. The 
ensuing reallocation of talent across different sectors of the economy 
would increase efficiency.

5. Costs

    While the proposed regulation effectively lowers the cost of 
participation in a MEP among employers, the rule may also lead to 
increased levels of noncompliance. For example, the section 413(c) plan 
administrator may become less diligent about ensuring that 
participating employers within a MEP are responsible employers. By 
potentially increasing noncompliance, the proposed regulation would 
impose new costs on section 413(c) plan administrators who are 
ultimately responsible for managing unresponsive employers. In 
particular, for a plan to maintain its tax-favored status, the section 
413(c) plan administrator is required to send notice to an unresponsive 
employer giving it 90 days to remedy the situation. If the unresponsive 
employer fails to comply, the plan administrator must send a second 
notice and then a final notice if the unresponsive employer still fails 
to comply after specified time periods. In the event of the initiation 
of the spinoff process, in which assets associated with an unresponsive 
employer are separated into a new plan that is then terminated, 
additional costs from the resulting compliance measures will be 
incurred by the section 413(c) plan administrator, who among other 
things is tasked with notifying all impacted participants and 
beneficiaries. These additional costs may be directly passed on to 
unresponsive employers. However, it's possible that section 413(c) plan 
administrators may spread these costs across all participating 
employers that would either absorb or pass those costs on to their 
employees.
    The proposed regulation may also indirectly lead to an increase in 
investment fees by increasing uncertainty in the size of a MEP's asset 
pool. For example, a plan may shrink considerably when assets of an 
unresponsive participating employer are spun off depending on that 
employer's share of the total asset pool. Since the cost savings in 
investment fees is derived from economies of scale, introducing 
uncertainty in plan size might induce management companies to increase 
prices to account for that risk. This cost would likely be spread 
across all employers participating in the MEP that might then pass 
those costs on to their employees.
    More general concerns pertaining to MEPs include their potential 
for abuse, such as fraud, mishandling of plan assets, or charging 
excessive fees.\23\ Relative to single-employer plans, MEPs may be more 
susceptible to abuse since coordination across participating employers 
may lead to confusion regarding each individual firm's fiduciary 
responsibilities. On the other hand, the enhanced disclosure and audit 
requirements applicable to large plans, together with the increased 
number of employers participating in a plan, might call attention to 
abuses that would have otherwise gone unnoticed had a small employer 
established its own plan.
---------------------------------------------------------------------------

    \23\ (83 FR 53534) (October 23, 2018).
---------------------------------------------------------------------------

6. Regulatory Alternatives

    The Treasury Department and the IRS considered alternatives to the 
proposed regulation. One alternative would have been to extend the 
proposed regulations to include defined benefit MEPs. However, this 
alternative was rejected because defined benefit plans raise additional 
issues, including issues arising from the minimum funding requirements 
and spinoff rules, such as the treatment in such a spinoff of any plan 
underfunding or overfunding. Commenters are asked, in the Comments and 
Requests for Public Hearing section of the preamble, to address those 
issues, as well as the circumstances in which the exception to the 
unified plan rule should be available to defined benefit plans.
    The Treasury Department and the IRS also considered whether the 
proposed regulation should include a more streamlined process for a 
section 413(c) plan administrator to satisfy the requirements for the 
exception to the unified plan rule. However, the notice requirements 
are intended to ensure 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, and the timing requirements are 
intended to give the unresponsive participating employer an adequate 
opportunity to take that remedial action or initiate a spinoff. These 
procedural requirements strike a balance between providing protection 
for unresponsive participating employers and their employees and not 
unduly burdening defined contribution MEPs. In the Comments and 
Requests for Public Hearing section of the preamble, commenters are 
asked to address whether the regulations should add mechanisms to avoid 
the potential for repetitive notices, as well as whether additional 
procedures should be added to facilitate the resolution of disputes 
between a section 413(c) plan administrator and an unresponsive 
participating employer.

[[Page 31787]]

7. Tables

                               Table 1--Retirement Plan Coverage by Employer Size
----------------------------------------------------------------------------------------------------------------
                                                                          Workers                Establishments
                                                           -----------------------------------------------------
                                                               Share  with          Share
           Establishment size: Number of workers              access to  a    participating in  Share offering a
                                                             retirement plan    a  retirement    retirement plan
                                                                   (%)            plan  (%)            (%)
----------------------------------------------------------------------------------------------------------------
1-49......................................................                49                34                45
50-99.....................................................                65                46                75
100-499...................................................                79                58                88
500+......................................................                89                76                94
All.......................................................                66                50                48
----------------------------------------------------------------------------------------------------------------
Source: These statistics apply to private industry. U.S. Bureau of Labor Statistics, National Compensation
  Survey, Employee Benefits in the U.S. (March 2018).


                                                           Table 2--Current Statistics on MEPS
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                          Number of MEPs         Total participants              Active participants                Total assets
--------------------------------------------------------------------------------------------------------------------------------------------------------
MEP Defined Contribution Plans........              4,630  4.4 million...................  3.7 million...................  $181 billion.
As a share of all ERISA Defined                      0.7%  4.4%..........................  4.6%..........................  3.2%.
 Contribution Plans.
MEP Defined Contribution Plans........              4,630  4.4 million...................  3.7 million...................  $181 billion.
    401(k) Plans......................              4,391  4.1 million...................  3.4 million...................  $166 billion.
    Other Defined Contribution Plans..                239  0.4 million...................  0.3 million...................  $15 billion.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: The Department of Labor performed these calculations using the 2016 Research File of Form 5500 filings. The estimates are weighted and rounded,
  which means they may not sum precisely. These estimates were derived by classifying a plan as a MEP if it indicated ``multiple employer plan'' status
  on the Form 5500 Part 1 Line A and if it did not report collective bargaining.


                                  Table 3--Average Expense Ratios of Mutual Funds in 401(k) Plans in Basis Points, 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                             Balanced
                                                       Domestic       International     Domestic bond    International      Target date    mutual funds
                    Plan assets                      equity mutual    equity mutual     mutual funds   bond mutual funds   mutual funds     (non-target
                                                         funds            funds                                                                date)
--------------------------------------------------------------------------------------------------------------------------------------------------------
$1M-$10M..........................................              81                101              72                 85              79              80
$10M-$50M.........................................              68                 85              59                 77              68              64
$50M-$100M........................................              55                 72              44                 66              54              50
$100M-$250M.......................................              52                 68              40                 64              55              45
$250M-$500M.......................................              49                 63              36                 67              50              42
$500M-$1B.........................................              45                 60              33                 65              50              39
More than $1B.....................................              36                 52              26                 65              48              32
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Average expense ratios are expressed in basis points and asset-weighted. The sample includes plans with audited 401(k) filings in the
  BrightScope database for 2015 and comprises 15,110 plans with $1.4 trillion in mutual fund assets. Plans were included if they had at least $1 million
  in assets and between 4 and 100 investment options. BrightScope/ICI, ``The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k)
  Plans, 2015'' (March 2018).


                              Table 4--Larger Plans Tend To Have Lower Fees Overall
----------------------------------------------------------------------------------------------------------------
                                                                    Total plan cost (in basis points)
                      Plan assets                       --------------------------------------------------------
                                                          10th Percentile         Median        90th Percentile
----------------------------------------------------------------------------------------------------------------
$1M-$10M...............................................                 75                111                162
$10M-$50M..............................................                 61                 91                129
$50M-$100M.............................................                 37                 65                 93
$100M-$250M............................................                 22                 54                 74
$250M-$500M............................................                 21                 48                 66
$500M-$1B..............................................                 21                 43                 59
More than $1B..........................................                 14                 27                 51
----------------------------------------------------------------------------------------------------------------
Source: Data is plan-weighted. The sample is plans with audited 401(k) filings in the BrightScope database for
  2015, which comprises 18,853 plans with $3.2 trillion in assets. Plans were included if they had at least $1
  million in assets and between 4 and 100 investment options. BrightScope/ICI, ``The BrightScope/ICI Defined
  Contribution Plan Profile: A Close Look at 401(k) Plans, 2015'' (March 2018).


[[Page 31788]]

II. Paperwork Reduction Act

    The collection of information in these proposed regulations is in: 
Sec.  1.413-2(g)(3)(i)(B) (requirement to adopt plan language); Sec.  
1.413-2(g)(4) (requirement to provide notice with respect to a 
participating employer failure); Sec.  1.413-2(g)(7)(i)(C) (requirement 
that spun-off plan have the same substantive terms as MEP); and Sec.  
1.413-2(g)(7)(i)(A) (requirement to provide notice of a spinoff-
termination). The collection of information contained in proposed Sec.  
1.413-2(g) will be carried out by plan administrators of defined 
contribution MEPs seeking to satisfy the conditions for the exception 
to the unified plan rule. The collection of information in this notice 
of proposed rulemaking has been submitted to the Office of Management 
and Budget for review in accordance with the Paperwork Reduction Act of 
1995 (44 U.S.C. 3507(d)).

1. Plan Amendment Adoption Requirement, Sec.  1.413-2(g)(3)(i)(B)

    Section 1.413-2(g)(3)(i)(B) states that as a condition of the 
exception to the unified plan rule, a defined contribution MEP must be 
amended to include plan language that describes the procedures that 
would be followed to address participating employer failures, including 
the applicable procedures that apply if an unresponsive participating 
employer does not respond to the section 413(c) plan administrator's 
requests to remedy the failures.
    A defined contribution MEP will not be eligible for the exception 
to the unified plan rule if it does not satisfy this plan-language 
requirement. Without it, the defined contribution MEP will not be able 
to avail itself of the exception to the unified plan rule, and will 
continue to be at risk of disqualification due to the actions or 
inactions of a single unresponsive participating employer. Since only 
one amendment is required, this is a one-time paperwork burden for each 
defined contribution MEP. In addition, after final regulations are 
issued, the IRS intends to publish a model plan amendment, which will 
help to minimize the burden.
    We estimate that the burden for this requirement under the 
Paperwork Reduction Act of 1995 will be three hours per defined 
contribution MEP. Given the size of the burden and the potential 
benefits of satisfying the exception to the unified plan rule, we 
estimate that approximately 80 percent of defined contribution MEPs 
(3,704 MEPs \24\) will amend their plans to satisfy this condition. 
Therefore, the total burden of this requirement is estimated to be 
11,112 hours (3,704 defined contribution MEPs times three hours). 
However, because each defined contribution MEP that adopts an amendment 
will do so on a one-time basis, to determine an annual estimate, the 
total time is divided by three, or 3,704 hours annually (3,704 defined 
contribution MEPs times one hour).
---------------------------------------------------------------------------

    \24\ This calculation uses data from the 2016 Form 5500, 
``Annual Return/Report of Employee Benefit Plan.'' As noted earlier, 
these filings indicate that there are approximately 4,630 defined 
contribution MEPs.
---------------------------------------------------------------------------

2. Notice Requirements, Sec.  1.413-2(g)(4)

    Notice is another condition of the exception to the unified plan 
rule. The proposed regulations would require a section 413(c) plan 
administrator to send up to three notices informing the unresponsive 
participating employer of the participating employer failure and the 
consequences if the employer fails to take remedial action or initiate 
a spinoff from the defined contribution MEP. After each notice is 
provided, the employer has 90 days to take appropriate remedial action 
or initiate a spinoff from the defined contribution MEP. If the 
employer takes those actions after the first or second notice is 
provided, subsequent notices are not required. Thus, it is possible 
that a section 413(c) plan administrator will send fewer than three 
notices to an employer. However, because the notice requirements only 
apply if an employer has already been unresponsive to the section 
413(c) plan administrator's requests, we have estimated that in most 
cases, all three notices will be provided.
    We estimate that the burden of preparing the three notices will be 
three hours. Most of this burden relates to the first notice, which 
must describe the qualification failure and the potential consequences 
if the employer fails to take action to address it. The burdens of 
preparing the second and third notices are expected to be relatively 
insignificant, given that these notices must generally repeat the 
information that was included in the first notice. We estimate that 
approximately 33.3 percent of all defined contribution MEPs (1,542 
defined contribution MEPs) have or will have an unresponsive 
participating employer, necessitating the sending of these notices on 
an annual basis. Therefore, we estimate a burden of 4,626 hours (1,542 
defined contribution MEPs times three hours). We expect to be able to 
adjust these estimates based on experience after the regulations are 
finalized.
    Section 1.413-2(g)(4) also includes the burden of notice 
distribution. All three notices must be sent to the unresponsive 
participating employer. The third notice will also be provided to plan 
participants who are employees of the unresponsive participating 
employer and to the Department of Labor. We estimate that, on average, 
a section 413(c) plan administrator will send the third notice to 
approximately 50 recipients (employees of the unresponsive 
participating employer, the employer, and the Department of Labor). We 
expect that the burden of distributing these notices will be two hours 
per defined contribution MEP, for a total burden of 3,084 hours (1,542 
defined contribution MEPs times two hours).

3. Terms of Spun-Off Plan, Sec.  1.413-2(g)(7)(i)(C)

    After the third notice is provided, Sec.  1.413-2(g)(7)(i)(C) 
requires a section 413(c) plan administrator to implement a spinoff of 
the plan assets attributable to employees of an unresponsive 
participating employer. The assets must be spun-off into a separate 
plan that has the same substantive plan terms as the defined 
contribution MEP. We estimate that in a given year, a spinoff-
termination for an unresponsive participating employer will be made 
with respect to 20 percent of all defined contribution MEPs (926 
defined contribution MEPs therefore will be subject to this 
requirement). We also estimate that the burden associated with the 
requirement to create a spinoff plan will be 10 hours. Therefore, the 
total burden is estimated to be 9,260 hours (926 defined contribution 
MEPs times 10).

4. Notice of Spinoff-Termination, Sec.  1.413-2(g)(7)(i)(A)

    A section 413(c) plan administrator implementing a spinoff-
termination pursuant to Sec.  1.413-2(g)(7) must provide notification 
of the spinoff-termination to participants who are employees of the 
unresponsive employer. This notice requirement is in Sec.  1.413-
2(g)(7)(i)(A). We estimate that in a given year, 20 percent of all 
defined contribution MEPs (926 defined contribution MEPs) will 
implement a spinoff-termination of an unresponsive participating 
employer, and notice to participants will need to be provided with 
respect to those spinoff-terminations.
    Using the same numbers as the estimates for notice requirements 
under Sec.  1.413-2(g)(4), we estimate that for a defined contribution 
MEP that uses the

[[Page 31789]]

exception to the unified plan rule, approximately 50 notices of a 
spinoff-termination will need to be sent to participants who are 
employees of the unresponsive participating employer (and their 
beneficiaries). We also estimate that the total burden for this 
requirement is five hours. Based on this number, we estimate that the 
burden of preparing and distributing the notices will be 4,630 hours 
(926 defined contribution MEPs times five hours).

5. Reporting Spinoff or Spinoff-Termination to IRS, Sec. Sec.  1.413-
2(g)(6)(ii) and (g)(7)(iv)

    Any spinoff or spinoff-termination from a defined contribution MEP 
under the proposed regulations must be reported to the IRS (in 
accordance with forms, instructions, and other guidance). Because the 
IRS anticipates issuing a new form or revising an existing form for 
this purpose, the estimated reporting burden associated with proposed 
Sec. Sec.  1.413-2(g)(6)(ii) and (g)(7)(iv) will be reflected in the 
reporting burden associated with those forms, and therefore is not 
included here.
    Comments on the collection of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP; Washington, DC 
20224. Comments on the collection of information should be received by 
September 3, 2019. Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    Estimated total average annual recordkeeping burden: 25,304 hours.
    Estimated average annual burden per response: Between 7 and 27 
hours.
    Estimated number of recordkeepers: 926 to 3,704.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

III. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely 
to have a significant economic impact on a substantial number of small 
entities. Unless an agency determines that a proposal is not likely to 
have a significant economic impact on a substantial number of small 
entities, section 603 of the RFA requires the agency to present an 
initial regulatory flexibility analysis (IRFA) of the proposed rule. 
The Treasury Department and the IRS have not determined whether the 
proposed rule, when finalized, will likely have a significant economic 
impact on a substantial number of small entities. The determination of 
whether creating an exception to the unified plan rule for defined 
contribution MEPs will have a significant economic impact requires 
further study. However, because there is a possibility of significant 
economic impact on a substantial number of small entities, an IRFA is 
provided in these proposed regulations. The Treasury Department and the 
IRS invite comments on both the number of entities affected and the 
economic impact on small entities.
    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel of Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

1. Need for and Objectives of the Rule

    As discussed earlier in this preamble, under the unified plan rule, 
the failure of one employer participating in a MEP to satisfy a 
qualification requirement or to provide information needed to determine 
compliance with a qualification requirement puts the tax-favored status 
of the entire MEP at risk. By creating an exception to the unified plan 
rule, the proposed rule would ensure that, in certain circumstances, 
compliant participating employers will continue to maintain a qualified 
plan. Offering a workplace retirement plan is a valuable tool for small 
businesses in recruiting and retaining employees. By retaining tax-
favored status in a defined contribution MEP, participating employers 
will continue to be able to offer a workplace retirement plan for their 
employees.
    The proposed rule is expected to encourage the establishment of new 
defined contribution MEPs, as well as increase the participation of 
employers in existing defined contribution MEPs, in accordance with 
Executive Order 13847 and the policy of expanding workplace retirement 
plan coverage. MEPs are an efficient way to reduce costs and complexity 
associated with establishing and maintaining defined contribution 
plans, which could encourage more plan formation and broader 
availability of more affordable workplace retirement savings plans, 
especially among small employers and certain working owners. Thus, the 
Treasury Department and the IRS intend and expect that the proposed 
rule would deliver benefits primarily to the employees of many small 
businesses and their families, as well as, many small businesses 
themselves.

2. Affected Small Entities

    The Small Business Administration estimates in its 2018 Small 
Business Profile that 99.9 percent of United States businesses meet its 
definition of a small business.\25\ The applicability of these proposed 
regulations does not depend on the size of the business, as defined by 
the Small Business Administration. The Treasury Department and the IRS 
expect that the smallest businesses, those with less than 50 employees, 
are most likely to benefit from the savings derived from retaining tax-
favored status in a defined contribution MEP, as well as increasing 
participation in defined contribution MEPs, which are expected to occur 
as a result of the proposed rule. In Section 7 of the Regulatory Impact 
Analysis, see Table 1, which provides statistics on retirement plan 
coverage by the size of the employer. These same types of employers, 
which are disproportionately small businesses, are

[[Page 31790]]

more likely to participate in a workplace retirement plan after the 
proposed rule is finalized. The proposed rule will also affect small 
entities that participate in MEPs at the time the rule is finalized.
---------------------------------------------------------------------------

    \25\ The Small Business Administration, Office of Advocacy, 2018 
Small Business Profile. https://www.sba.gov/sites/default/files/advocacy/2018-Small-Business-Profiles-US.pdf. Last accessed 03/28/
2019. For purposes of the 2018 Small Business Profile, small 
businesses are defined as firms employing fewer than 500 employees.
---------------------------------------------------------------------------

3. Impact of the Rule

    Under the existing unified plan rule, a MEP may be disqualified due 
to the actions of one unresponsive participating employer. Upon 
disqualification, employers participating in a MEP and their employees 
would lose the tax benefits of participating in a qualified retirement 
plan (deduction for contributions, exclusion of investment returns, and 
deferred income recognition for employees). By creating an exception to 
the unified plan rule, the proposed regulation would allow a defined 
contribution MEP to remain qualified and thereby retain tax-favored 
benefits for participating employers and their employees. For example, 
if a defined contribution MEP that would have otherwise been 
disqualified satisfies the conditions for the exception to the unified 
plan rule, small entities that participate in the MEP will be able to 
continue to make contributions to the defined contribution MEP that are 
deductible under section 404(a)(3).
    In addition, as previously stated in the Special Analysis section 
of this preamble, this proposed rule could potentially result in an 
expansion of defined contribution MEPs, which could create a more 
affordable option for retirement savings coverage for many small 
businesses, thereby potentially yielding economic benefits for 
participating employers and their employees. Some advantages of a 
workplace retirement plan (including 401(k) plans, SEP-IRAs, and SIMPLE 
IRAs) over IRA-based savings options outside the workplace include: (1) 
Higher contribution limits; (2) potentially lower investment management 
fees, especially in larger plans; (3) a well-established uniform 
regulatory structure with important consumer protections, including 
qualification requirements relating to protected benefits, vesting, 
disclosures, and spousal protections; (4) automatic enrollment; and (5) 
stronger protections from creditors. At the same time, workplace 
retirement plans provide employers with choice among plan features and 
the flexibility to tailor retirement plans that meet their business and 
employment needs.
    The ERISA recordkeeping and reporting requirements could decrease 
for some small employers that would have maintained a single-employer 
defined contribution plan but instead join a defined contribution MEP. 
This includes costs associated with filing Form 5500 and fulfilling 
audit requirements to the extent a MEP is considered a single plan 
under ERISA. Thus, one Form 5500 and audit report would satisfy the 
reporting requirements, and each participating employer would not need 
to file its own, separate Form 5500 and, for large plans or those few 
small plans that do not meet the small plan audit waiver, an audit 
report.
    The cost savings of an employer participating in a defined 
contribution MEP may be partially offset by the costs of complying with 
the conditions for the exception to the unified plan rule, including 
new recordkeeping and reporting requirements. Additional costs from 
these actions will be incurred by the section 413(c) plan 
administrator, who among other things is tasked with adopting plan 
language (Sec.  1.413-2(g)(3)(i)(B)), providing notice concerning a 
participating employer failure to unresponsive participating employers, 
participants, beneficiaries, and the Department of Labor (Sec.  1.413-
2(g)(4)), notifying participants and beneficiaries of a spinoff-
termination (Sec.  1.413-2(g)(7)(ii)), and implementing a spinoff of 
the MEP assets related to an unresponsive participating employer and 
creating a spun-off plan document (Sec.  1.413-2(g)(7)(i)). Although 
the Treasury Department and the IRS do not have sufficient data to 
determine precisely the likely extent of the increased costs of 
compliance, the estimated burden of complying with the recordkeeping 
and reporting requirements are described in the Paperwork Reduction Act 
section of the preamble. While the burdens associated with the 
recordkeeping and reporting requirements are imposed on the defined 
contribution MEP and not the participating employers, those additional 
costs may be directly passed on to participating employers.
    Another partial offset to the cost savings is the potential for an 
unresponsive participating employer to have its participation in a MEP 
terminated as a result of the MEP's compliance with these proposed 
regulations. The proposed regulations state that if an unresponsive 
participating employer fails to take appropriate remedial action to 
correct a qualification failure, one of the following actions must 
occur in order for the MEP to meet the conditions for the exception to 
the unified plan rule: (a) A spinoff initiated by the unresponsive 
participating employer and implemented by the section 413(c) plan 
administrator or (b) a spinoff-termination pursuant to plan terms. The 
Treasury Department and the IRS anticipate that compared to the number 
of small entities that will benefit from these proposed rules, 
relatively few employers will have their plans spun-off or spun-off and 
terminated.
    As previously stated in the Regulatory Impact Analysis of this 
preamble, the Treasury Department and the IRS considered alternatives 
to the proposed regulations. One of the conditions that a defined 
contribution MEP must satisfy in order to be eligible for the exception 
to the unified plan rule is that the section 413(c) plan administrator 
provides notice and an opportunity for the unresponsive participating 
employer to take action with respect to the participating employer 
failure. The proposed regulations would require that the section 413(c) 
plan administrator provide up to three notices to the unresponsive 
participating employer, informing the employer (and in some cases, 
participants and the Department of Labor) of the participating employer 
failure and the consequences for failing to take remedial action or 
initiate a spinoff from the defined contribution MEP. After each notice 
is provided, the unresponsive participating employer has 90 days to 
take appropriate remedial action or initiate a spinoff from the defined 
contribution MEP. For more information about the notice requirements, 
see Section II.B of the Explanation of Provisions in this preamble.
    In addition to the alternatives discussed in the Regulatory Impact 
Analysis of this preamble, the Treasury Department and the IRS 
considered whether the proposed regulations should reduce the number of 
notices or the timing between providing notices in order for a section 
413(c) plan administrator to satisfy this condition for the exception 
to the unified plan rule. The notice and accompanying timing 
requirements were provided for because the notice procedures are 
intended to ensure that an unresponsive participating employer and its 
employees are aware of the adverse consequences if the employer neither 
takes appropriate remedial action nor initiates a spinoff, and the 
timing requirements are intended to give the unresponsive participating 
employer sufficient time to take that remedial action or initiate a 
spinoff. The Treasury Department and the IRS believe that, given the 
adverse consequences of a spinoff-termination to plan participants, the 
notice and accompanying timing requirements strike a balance between 
providing protection for unresponsive participating employers and their

[[Page 31791]]

employees and not unduly burdening the section 413(c) plan 
administrators in defined contribution MEPs. In the Comments and 
Requests for Public Hearing section of the preamble, commenters are 
asked to address whether the regulations should add mechanisms to avoid 
the potential for repetitive notices, as well as whether additional 
procedures should be added to facilitate the resolution of disputes 
between a section 413(c) plan administrator and an unresponsive 
participating employer.

4. Duplicate, Overlapping, or Relevant Federal Rules

    The proposed rule would not conflict with any relevant federal 
rules. As discussed above, the proposed rule would merely create an 
exception to the unified plan rule for defined contribution MEPs.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the Treasury Department and the IRS as prescribed in this preamble 
under the ADDRESSES heading. The Treasury Department and the IRS 
request comments on all aspects of the proposed rules. Comments 
specifically are requested on the following topics:
     The circumstances, if any, in which the exception to the 
unified plan rule should be available to defined benefit plans (taking 
into account issues arising from the minimum funding requirements and 
spinoff rules for defined benefit plans, including the treatment in 
such a spinoff of any plan underfunding or overfunding).
     Whether the regulations should include additional 
requirements for MEPs to be eligible for the exception to the unified 
plan rule, including additional procedures to facilitate the resolution 
of disputes between a section 413(c) plan administrator and an 
unresponsive participating employer.
     Whether the regulations should add appropriate mechanisms 
to avoid the potential for repetitive notices or to shorten the notice 
period for a potential qualification failure that becomes a known 
qualification failure. Those mechanisms might include, for example, 
treating the first notice that the section 413(c) plan administrator 
provided in connection with the potential qualification failure as 
satisfying the requirement to provide the first notice in connection 
with the known qualification failure, with appropriate modification of 
the second and third notices.
     For purposes of a spinoff, how to treat participants who 
have a single account with assets attributable to service with the 
unresponsive participating employer and one or more other participating 
employers, or who have a separate rollover account that is not 
attributable to service with the unresponsive participating employer.
     What additional guidance should be provided on terminating 
a plan in the case of a spinoff-termination. This might include, for 
example, rules that are similar to the relief provided in section 4, 
Q&A-1, of Rev. Proc. 2003-86, 2003-2 C.B. 1211, that any other plan 
maintained by an unresponsive participating employer will not be 
treated as an alternative plan under Sec.  1.401(k)-1(d)(4)(i) for 
purposes of the ability to make distributions upon termination of the 
spun-off plan. It might also address the Sec.  1.411(a)-11(e)(1) rules 
for distributions upon plan termination
     Whether there are any studies that would help to quantify 
the impact of the proposed regulations.
    Also, consistent with the Executive Order, comments are 
specifically requested on any steps that the Secretary of Labor should 
take to facilitate the implementation of these proposed regulations. 
The Department of Labor has informed the Treasury Department and the 
IRS that a section 413(c) plan administrator implementing a spinoff-
termination may have concerns about its fiduciary responsibility both 
to the MEP and to the spun-off plan, as well as potential prohibited 
transaction issues. Commenters are encouraged to provide feedback on 
these issues and address the need for additional interpretive guidance 
or prohibited transaction exemptions from the Department of Labor to 
facilitate the implementation of these regulations.\26\ Copies of 
comments on these topics will be forwarded to the Department of Labor.
---------------------------------------------------------------------------

    \26\ For an example of this type of interpretative guidance and 
a related prohibited transaction exemption in the context of a 
terminating abandoned plan, see 29 CFR 2578.1 (establishing 
procedures for qualified termination administrators to terminate 
abandoned plans and distribute benefits with limited liability under 
title I of ERISA) and Prohibited Transaction Exemption 2006-06 (71 
FR 20856, Apr. 21, 2006).
---------------------------------------------------------------------------

    All comments will be available for public inspection and copying at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person who timely submits written 
comments. If a public hearing is scheduled, notice of the date, time, 
and place of the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal authors of these regulations are Jamie Dvoretzky and 
Pamela Kinard, Office of Associate Chief Counsel (Employee Benefits, 
Exempt Organizations, and Employment Taxes (EEE)). However, other 
personnel from the IRS and the Treasury Department participated in the 
development of these regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part:

    Authority: 26 U.S.C. 7805 * * *

0
Par. 2. Section 1.413-2 is amended by:
0
1. Removing paragraph (a)(3)(iv).
0
2. Adding and reserving paragraphs (e) and (f).
0
3. Adding paragraph (g).
    The additions read as follows:


Sec.  1.413-2  Special rules for plans maintained by more than one 
employer.

* * * * *
    (e) [Reserved]
    (f) [Reserved]
    (g) Qualification of a section 413(c) plan--(1) General rule. 
Except as provided in paragraph (g)(2) of this section, the 
qualification of a section 413(c) plan under section 401(a) or 403(a), 
taking into account the rules of section 413(c) and this section, is 
determined with respect to all participating employers. Consequently, 
the failure by one participating employer (or by the plan itself) to 
satisfy an applicable qualification requirement will result in the 
disqualification of the section 413(c) plan for all participating 
employers.
    (2) Exception to general rule for participating employer failures--
(i) In general. A section 413(c) plan that is a defined contribution 
plan will not be disqualified on account of a participating employer 
failure, provided that the following conditions are satisfied--
    (A) The section 413(c) plan satisfies the eligibility requirements 
of paragraph (g)(3) of this section;
    (B) The section 413(c) plan administrator satisfies the notice

[[Page 31792]]

requirements described in paragraph (g)(4) of this section;
    (C) If the unresponsive participating employer fails to take 
appropriate remedial action with respect to the participating employer 
failure, as described in paragraph (g)(5)(ii) of this section, the 
section 413(c) plan administrator implements a spinoff described in 
paragraph (g)(2)(ii) of this section; and
    (D) The section 413(c) plan administrator complies with any 
information request that the IRS or a representative of the spun-off 
plan makes in connection with an IRS examination of the spun-off plan, 
including any information request related to the participation of the 
unresponsive participating employer in the section 413(c) plan for 
years prior to the spinoff.
    (ii) Spinoff. A spinoff is described in this paragraph (g)(2)(ii) 
if it satisfies either of the following requirements--
    (A) The spinoff is initiated by the unresponsive participating 
employer, as described in paragraph (g)(5)(iii) of this section, and 
implemented by the section 413(c) plan administrator, as described in 
paragraph (g)(6)(ii) of this section; or
    (B) The spinoff is a spinoff-termination pursuant to plan terms, as 
described in paragraph (g)(7) of this section.
    (iii) Definitions. The following definitions apply for purposes of 
this paragraph (g):
    (A) Employee. An employee is a current or former employee of a 
participating employer.
    (B) Known qualification failure. A known qualification failure is a 
failure to satisfy a qualification requirement with respect to a 
section 413(c) plan that is identified by the section 413(c) plan 
administrator and is attributable solely to an unresponsive 
participating employer. For purposes of this paragraph (g)(2)(iii)(B), 
an unresponsive participating employer includes any employer that is 
treated as a single employer with that unresponsive participating 
employer under section 414(b), (c), (m), or (o)).
    (C) Participating employer. A participating employer is one of the 
employers maintaining a section 413(c) plan.
    (D) Participating employer failure. A participating employer 
failure is a known qualification failure or a potential qualification 
failure.
    (E) Potential qualification failure. A potential qualification 
failure is a failure to satisfy a qualification requirement with 
respect to a section 413(c) plan that the section 413(c) plan 
administrator reasonably believes might exist, but the section 413(c) 
plan administrator is unable to determine whether the qualification 
requirement is satisfied solely due to an unresponsive participating 
employer's failure to provide data, documents, or any other information 
necessary to determine whether the section 413(c) plan is in compliance 
with the qualification requirement as it relates to the participating 
employer. For purposes of this paragraph (g)(2)(iii)(E), an 
unresponsive participating employer includes any employer that is 
treated as a single employer with that unresponsive participating 
employer under section 414(b), (c), (m), or (o)).
    (F) Section 413(c) plan administrator. A section 413(c) plan 
administrator is the plan administrator of a section 413(c) plan, 
determined under the rules of section 414(g).
    (G) Unresponsive participating employer. An unresponsive 
participating employer is a participating employer in a section 413(c) 
plan that fails to comply with 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.
    (3) Eligibility for exception to general rule--(i) In general. To 
be eligible for the exception described in paragraph (g)(2) of this 
section, a section 413(c) plan must satisfy the following 
requirements--
    (A) Practices and procedures. The section 413(c) plan administrator 
has established practices and procedures (formal or informal) that are 
reasonably designed to promote and facilitate overall compliance with 
applicable Code requirements, including procedures for obtaining 
information from participating employers.
    (B) Plan language. The section 413(c) plan document describes the 
procedures that would be followed to address participating employer 
failures, including the procedures that the section 413(c) plan 
administrator would follow if the unresponsive participating employer 
does not take appropriate remedial action or initiate a spinoff 
pursuant to paragraph (g)(5) of this section.
    (C) Not under examination. At the time the first notice described 
in paragraph (g)(4)(i) of this section is provided to the unresponsive 
participating employer, the section 413(c) plan is not under 
examination under the rules of paragraph (g)(3)(ii) of this section.
    (ii) Under examination. For purposes of this section, a plan is 
under examination if--
    (A) The plan is under an Employee Plans examination (that is, an 
examination of a Form 5500 series or other examination by the Employee 
Plans Office of the Tax Exempt and Government Entities Division of the 
IRS (Employee Plans) (or any successor IRS office that has jurisdiction 
over qualified retirement plans));
    (B) The plan is under investigation by the Criminal Investigation 
Division of the IRS (or its successor); or
    (C) The plan is treated as under an Employee Plans examination 
under the rules of paragraph (g)(3)(iii) of this section.
    (iii) Certain plans treated as under an Employee Plans 
examination--(A) Notification of pending examination. For purposes of 
this section, a plan is treated as under an Employee Plans examination 
if the section 413(c) plan administrator, or an authorized 
representative, has received verbal or written notification from 
Employee Plans of an impending Employee Plans examination, or of an 
impending referral for an Employee Plans examination. A plan is also 
treated as under an Employee Plans examination if it has been under an 
Employee Plans examination and the plan has an appeal pending with the 
IRS Office of Appeals (or its successor), or is in litigation with the 
IRS, regarding issues raised in an Employee Plans examination.
    (B) Pending determination letter application--(1) Possible failures 
identified by IRS. For purposes of this section, a section 413(c) plan 
is treated as under an Employee Plans examination if a Form 5300, 
``Application for Determination for Employee Benefit Plan,'' Form 5307, 
``Application for Determination for Adopters of Modified Volume 
Submitter Plans,'' or Form 5310, ``Application for Determination for 
Terminating Plan'' (or any successor form for one or more of these 
forms) has been submitted with respect to the plan and the IRS agent 
notifies the applicant of possible qualification failures, whether or 
not the applicant is officially notified of an examination. This 
includes a case in which, for example, a determination letter on plan 
termination had been submitted with respect to the plan, and an IRS 
agent notifies the applicant that there are partial termination 
concerns. In addition, if, during the review process, the IRS agent 
requests additional information that indicates the existence of a 
failure not previously

[[Page 31793]]

identified by the applicant, then the plan is treated as under an 
Employee Plans examination (even if the determination letter 
application is subsequently withdrawn).
    (2) Failures identified by determination letter applicant. For 
purposes of paragraph (g)(3)(iii)(B)(1) of this section, an IRS agent 
is not treated as notifying a determination letter applicant of a 
possible qualification failure if the applicant (or the authorized 
representative) has identified the failure, in writing, to the 
reviewing IRS agent before the agent recognizes the existence of the 
failure or addresses the failure in communications with the applicant. 
For purposes of this paragraph (g)(3)(iii)(B)(2), submission of a 
determination letter application does not constitute an identification 
of a failure to the IRS.
    (C) Aggregated plans. For purposes of this section, a plan is 
treated as under an Employee Plans examination if it is aggregated for 
purposes of satisfying the nondiscrimination requirements of section 
401(a)(4), the minimum participation requirements of section 
401(a)(26), the minimum coverage requirements of section 410(b), or the 
requirements of section 403(b)(12)(A)(i), with any plan that is under 
an Employee Plans examination. In addition, a plan is treated as under 
an Employee Plans examination with respect to a failure of a 
qualification requirement (other than those described in the preceding 
sentence) if the plan is aggregated with another plan for purposes of 
satisfying that qualification requirement (for example, section 
401(a)(30), 415, or 416) and that other plan is under an Employee Plans 
examination. For purposes of this paragraph (g)(3)(iii)(C), the term 
aggregation does not include consideration of benefits provided by 
various plans for purposes of the average benefits test set forth in 
section 410(b)(2).
    (4) Notice requirements. The section 413(c) plan administrator 
satisfies the notice requirements with respect to a participating 
employer failure if it satisfies the requirements of this paragraph 
(g)(4).
    (i) First notice. The section 413(c) plan administrator must 
provide notice to the unresponsive participating employer describing 
the participating employer failure, the remedial actions the employer 
would need to take to remedy the failure, and the employer's option to 
initiate a spinoff of plan assets and account balances attributable to 
participants who are employees of that employer. In addition, the 
notice must explain the consequences under plan terms if the 
unresponsive participating employer neither takes appropriate remedial 
action with respect to the participating employer failure nor initiates 
a spinoff, including the possibility that a spinoff of assets and 
account balances attributable to participants who are employees of that 
employer would occur, followed by a termination of that plan.
    (ii) Second notice. If, by the end of the 90-day period following 
the date the first notice described in paragraph (g)(4)(i) of this 
section is provided, the unresponsive participating employer neither 
takes appropriate remedial action with respect to the participating 
employer failure nor initiates a spinoff, then the section 413(c) plan 
administrator must provide a second notice to the employer. The second 
notice must be provided no later than 30 days after the expiration of 
the 90-day period described in the preceding sentence. The second 
notice must include the information required to be included in the 
first notice and must also specify that if, within 90 days following 
the date the second notice is provided, the employer neither takes 
appropriate remedial action with respect to the participating employer 
failure nor initiates a spinoff, a notice describing the participating 
employer failure and the consequences of not correcting that failure 
will be provided to participants who are employees of the unresponsive 
participating employer (and their beneficiaries) and to the Department 
of Labor.
    (iii) Third notice. If, by the end of the 90-day period following 
the date the second notice described in paragraph (g)(4)(ii) of this 
section is provided, the unresponsive participating employer neither 
takes appropriate remedial action with respect to the participating 
employer failure nor initiates a spinoff, then the section 413(c) plan 
administrator must provide a third notice to that employer. The third 
notice must be provided no later than 30 days after the expiration of 
the 90-day period described in the preceding sentence. Within this time 
period, the third notice must also be provided to participants who are 
employees of that employer (and their beneficiaries) and to the Office 
of Enforcement of the Employee Benefits Security Administration in the 
Department of Labor (or its successor office). The third notice must 
include the information required to be included in the first notice, 
the deadline for employer action, and an explanation of any adverse 
consequences to participants in the event that a spinoff-termination 
occurs, and state that the notice is being provided to participants who 
are employees of the unresponsive participating employer (and their 
beneficiaries) and to the Department of Labor.
    (5) Actions by unresponsive participating employer--(i) In general. 
An unresponsive participating employer takes appropriate remedial 
action with respect to a participating employer failure for purposes of 
paragraph (g)(2)(i)(C) of this section if it satisfies the requirements 
of paragraph (g)(5)(ii) of this section. Alternatively, an unresponsive 
participating employer initiates a spinoff with respect to a 
participating employer failure for purposes of paragraph (g)(2)(ii)(A) 
of this section if the employer satisfies the requirements of paragraph 
(g)(5)(iii) of this section. The final deadline for an unresponsive 
participating employer to take one of these actions is 90 days after 
the third notice is provided. See paragraph (g)(7) of this section for 
the consequences of the employer's failure to meet this deadline.
    (ii) Appropriate remedial action--(A) Appropriate remedial action 
with respect to potential qualification failure. An unresponsive 
participating employer takes appropriate remedial action with respect 
to a potential qualification failure if the employer provides data, 
documents, or any other information necessary for the section 413(c) 
plan administrator to determine whether a qualification failure exists. 
If the unresponsive participating employer provides this information, 
the section 413(c) plan administrator determines that, based on this 
information, a qualification failure exists that is attributable solely 
to that employer, and the participating employer fails to comply with 
reasonable and timely requests from the section 413(c) plan 
administrator to take actions that are needed to correct that 
qualification failure, then the qualification failure becomes a known 
qualification failure. In that case, the section 413(c) plan will be 
eligible for the exception in paragraph (g)(2) of this section with 
respect to the known qualification failure by satisfying the conditions 
set forth in paragraph (g)(2) of this section with respect to that 
known qualification failure, taking into account the rules of paragraph 
(g)(6)(i) of this section.
    (B) Appropriate remedial action with respect to known qualification 
failure. An unresponsive participating employer takes appropriate 
remedial action with respect to a known qualification failure if the 
employer takes action, such as making corrective contributions, that 
corrects, or enables the section 413(c) plan administrator to correct, 
the known qualification failure.

[[Page 31794]]

    (iii) Employer-initiated spinoff. An unresponsive participating 
employer initiates a spinoff pursuant to this paragraph (g)(5)(iii) if, 
after receiving a notice described in paragraph (g)(4) of this section, 
the employer directs the section 413(c) plan administrator to spin off 
plan assets and account balances held on behalf of its employees to a 
separate single-employer plan established and maintained by that 
employer in a manner consistent with plan terms.
    (6) Actions by section 413(c) plan administrator--(i) Rules for a 
potential qualification failure that becomes a known qualification 
failure. For purposes of applying paragraph (g)(2) of this section to a 
potential qualification failure that becomes a known qualification 
failure, actions taken (including notices provided) when the failure 
was a potential qualification failure are not taken into account. For 
example, a notice that the section 413(c) plan administrator provided 
in connection with the potential qualification failure would not 
satisfy the notice requirements for the known qualification failure. 
However, in determining whether the section 413(c) plan is under 
examination, as described in paragraph (g)(3)(iii) of this section, as 
of the date of the first notice describing the known qualification 
failure, the section 413(c) plan administrator will be treated as 
providing that notice on the date the first notice was provided with 
respect to the related potential qualification failure, but only if the 
following conditions are satisfied--
    (A) After determining that a qualification failure exists, the 
section 413(c) plan administrator makes a reasonable and timely request 
to the participating employer to take actions that are needed to 
correct the failure, and
    (B) As soon as reasonably practicable after the participating 
employer fails to respond to that request, the section 413(c) plan 
administrator provides the first notice described in paragraph 
(g)(4)(i) of this section with respect to the known qualification 
failure.
    (ii) Implementing employer-initiated spinoff. If an unresponsive 
participating employer initiates a spinoff pursuant to paragraph 
(g)(5)(iii) of this section by directing the section 413(c) plan 
administrator to spin off the assets and account balances held on 
behalf of its employees to a separate single-employer plan established 
and maintained by the employer, the section 413(c) plan administrator 
must implement and complete a spinoff of the assets and account 
balances held on behalf of the employees of the employer that are 
attributable to their employment by the employer within 180 days of the 
date on which the unresponsive participating employer initiates the 
spinoff. The section 413(c) plan administrator must report the spinoff 
to the IRS (in the manner prescribed by the IRS in forms, instructions, 
and other guidance).
    (7) Spinoff-termination--(i) Spinoff. If the unresponsive 
participating employer neither takes appropriate remedial action 
described in paragraph (g)(5)(ii) of this section nor initiates a 
spinoff pursuant to paragraph (g)(5)(iii) of this section, then, in 
accordance with plan language, the section 413(c) plan administrator 
must take the following steps as soon as reasonably practicable after 
the deadline described in paragraph (g)(5)(i) of this section--
    (A) Send notification of spinoff-termination to participants who 
are employees of the unresponsive participating employer (and their 
beneficiaries) as described in paragraph (g)(7)(iii) of this section.
    (B) Stop accepting contributions from the unresponsive 
participating employer;
    (C) Implement a spinoff, in accordance with the transfer 
requirements of section 414(l) and the anti-cutback requirements of 
section 411(d)(6), of the plan assets and account balances held on 
behalf of employees of the unresponsive participating employer that are 
attributable to their employment by that employer 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; and
    (D) Terminate the spun-off plan and distribute assets of the spun-
off plan to plan participants (and their beneficiaries) as soon as 
reasonably practicable after the plan termination date.
    (ii) Termination of spun-off plan. In terminating the spun-off 
plan, the section 413(c) plan administrator must--
    (A) Reasonably determine whether, and to what extent, the survivor 
annuity requirements of sections 401(a)(11) and 417 apply to any 
benefit payable under the plan and take reasonable steps to comply with 
those requirements (if applicable);
    (B) Provide each participant and beneficiary with a nonforfeitable 
right to his or her accrued benefits as of the date of plan 
termination, subject to income, expenses, gains, and losses between 
that date and the date of distribution; and
    (C) Notify the participants and beneficiaries of their rights under 
section 402(f).
    (iii) Contents of the notification of spinoff-termination. For the 
notice required to be provided in paragraph (g)(7)(i)(A), the section 
413(c) plan administrator must provide information relating to the 
spinoff-termination to participants who are employees of the 
unresponsive participating employer (and their beneficiaries), 
including the following--
    (A) Identification of the section 413(c) plan and contact 
information for the section 413(c) plan administrator;
    (B) The effective date of the spinoff-termination;
    (C) A statement that no more contributions will be made to the 
section 413(c) plan;
    (D) A statement that as soon as practicable after the spinoff-
termination, participants and beneficiaries will receive a distribution 
from the spun-off plan; and
    (E) A statement that before the distribution occurs, participants 
and beneficiaries will receive additional information about their 
options with respect to that distribution.
    (iv) Reporting spinoff-termination. The section 413(c) plan 
administrator must report a spinoff-termination pursuant to this 
paragraph (g)(7) to the IRS (in the manner prescribed by the IRS in 
forms, instructions, and other guidance).
    (8) Other rules--(i) Form of notices. Any notice provided pursuant 
to paragraph (g)(4) or (g)(7)(i)(A) of this section may be provided in 
writing or in electronic form. For notices provided to participants and 
beneficiaries, see generally Sec.  1.401(a)-21 for rules permitting the 
use of electronic media to provide applicable notices to recipients 
with respect to retirement plans.
    (ii) Qualification of spun-off plan--(A) In general. In the case of 
any plan that is spun off in accordance with paragraph (g)(6)(ii) or 
(g)(7) of this section, any participating employer failure that would 
have affected the qualification of the section 413(c) plan, but for the 
application of the exception set forth in paragraph (g)(2) of this 
section, will be a qualification failure with respect to the spun-off 
plan.
    (B) Favorable tax treatment upon termination. Notwithstanding 
paragraph (g)(8)(ii)(A) of this section, distributions made from a 
spun-off plan that is terminated in accordance with paragraph (g)(7) of 
this section will not, solely because of the participating employer 
failure, fail to be eligible for favorable tax treatment accorded to 
distributions from qualified plans (including that the distributions 
will be treated as eligible rollover distributions under section 
402(c)(4)), except as

[[Page 31795]]

provided in paragraph (g)(8)(ii)(C) of this section.
    (C) Exception for responsible parties. The IRS reserves the right 
to pursue appropriate remedies under the Code against any party (such 
as the owner of the participating employer) who is responsible for the 
participating employer failure. The IRS may pursue appropriate remedies 
against a responsible party even in the party's capacity as a 
participant or beneficiary under the spun-off plan that is terminated 
in accordance with paragraph (g)(7) of this section (such as by not 
treating a plan distribution made to the responsible party as an 
eligible rollover distribution).
    (iii) Additional guidance. The Commissioner may provide additional 
guidance in revenue rulings, notices, or other guidance published in 
the Internal Revenue Bulletin, or in forms and instructions, that the 
Commissioner determines to be necessary or appropriate with respect to 
the requirements of this paragraph (g).
    (9) Applicability date. This paragraph (g) applies on or after the 
date of publication of the Treasury decision adopting these rules as 
final regulations in the Federal Register.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-14123 Filed 7-2-19; 8:45 am]
 BILLING CODE 4830-01-P