Picture this: you’re sitting in your seventh grade classroom and your teacher asks “can someone give me an example of a multinational bank?”  One of your classmates responds in a stage whisper “a piggy bank!”  The entire class erupts into laughter, but your teacher isn’t amused and demands to know the culprit.  No one owns up, and, in fact, some of your classmates are still laughing, so the teacher issues a whole class detention for that same afternoon.  This is upsetting to you because you totally had plans to [insert generationally appropriate pastime here] after school.

If this scenario involving collective punishment evokes memories for you, then you have a basic understanding of the IRS’ “one-bad-apple” rule with respect to multiple employer plans (“MEPs”).  MEPs are retirement plans that are maintained by two or more unrelated employers and are subject to the provisions of Section 413(c) of the Internal Revenue Code (“Code”).


Under the Code Section 413(c) unified plan rule, colloquially known as the “one-bad-apple” rule, all employers who participate in a MEP are treated as a single employer for certain plan qualification requirements.  For this reason, all participating employers must comply with all plan qualification requirements applicable to the MEP because if any one participating employer has a qualification failure and doesn’t take any steps to correct the failure, the MEP may be disqualified for all participating employers.  The IRS – in an effort to avoid being compared to your seventh grade teacher, but really to increase the availability of tax-favored retirement plans to employees, particularly for employees of small businesses – recently issued proposed regulations intended to minimize this disqualification risk.

The proposed regulations provide an exception to the one-bad-apple plan rule so that a MEP will not be disqualified because of a known or potential qualification failure of an unresponsive participating employer, provided the following conditions are met:

The MEP satisfies certain eligibility requirements (for example, the plan administrator of the MEP is required to establish practices and procedures (whether formal or informal) to promote compliance with the qualification requirements, including procedures for obtaining information from participating employers);

The MEP’s plan administrator provides notice and an opportunity for the participating employer to take remedial action to correct the qualification failure;
If the unresponsive participating employer fails to take appropriate remedial action, the plan administrator implements a spin-off of the assets of that participating employer into an individual plan; and
The plan administrator complies with any information request from the IRS or a representative of the spun-off plan that is related to an IRS examination of the spun-off plan, including the participation of the unresponsive participating employer in the MEP for years prior to the spin-off.  For purposes of the proposed rule, a spin-off is either (a) a spin-off initiated by the participating employer and implemented by the plan administrator, or (b) a spin-off termination implemented by the plan administrator pursuant to the terms of the MEP.

The exception applies in cases where a MEP has a qualification failure caused by a participating employer that the employer is unable or unwilling to correct, or a participating employer fails to comply with a plan administrator’s request for information about a qualification failure that the plan administrator reasonably believes might exist.

The IRS is accepting comments on the proposed regulations through October 1, 2019 and the regulations are inapplicable until they have been finalized.  We will keep you posted on any developments.