One of the most significant challenge facing PEP and MEPs is probably having to deal with “bad acting employers,” that is, those who won’t provide sufficient information to auditors to complete the audit for the whole plan; those regularly do not make timely submissions of elective deferrals; those who aren’t up-front with information about their controlled groups; or those who don’t perform any other of a number of mundane tasks with which any employer sponsoring a plan (or, in the case of a MEP or PEP, co-sponsoring the plan) need to complete. The challenge for the Pooled Plan Provider or the MEP lead sponsor is that many of the consequences for those failures can fall on everyone but the bad actor. There are a variety of ways to address those bad actors in these PEP plan documents, but they all take time-with often the curative acts crossing plan years, where the damage has already been done for that year.
These common problems are barely addressed by the SECURE Act’s fix to the “one bad apple” rule (called the “unified plan rule” by the IRS, under which a participating employer’s disqualification error will disqualify the entire plan), though there seems to be a common misunderstanding in the industry to the contrary. That new “bad apple” fix actually has very little operational impact on a MEP /PEP whose operations has been affected by that bad actor. It provides only a narrow remedy to a narrow issue by which a P3 or lead sponsor can get rid of an employer who causes an operational/qualification error in the plan-though it may take up to a year to do so if one is to follow the IRS’s pre-SECURE Act proposed regs.
Frankly, experience tells us that the “unified plan”rule has not been a horrible problem for MEPs in the past, especially with the ability to fix most of these errors using EPCRS. PEPs and MEPS do actually use other, more expedited procedures to get rid of problematic participating employers where it is needed from an operational standpoint.
The more frequently occurring problems which are not addressed by the SECURE Act are those caused by the time it takes to correct other more mundane problems which arise during normal plan operations that a bad actor can cause a plan. Let’s say, for example, the bad acting employer does not provide the P3 with the employment data needed to accurately complete the form 5500, or it doesn’t provide the auditor with the access the employment records need to complete the audit. This becomes a potentially expensive 5500 filing issue for the P3 or lead sponsor which cannot be fixed by the IRS’s “unified plan” fix, especially if it occurs late in the plan year. Even assuming the P3 is following the new IRS’s proposed disgorgement procedures to protect the plan from “bad apple” consequences, but because of the timing demands of the IRS’s procedure, a plan year will almost always be crossed. This means that this an error can cause a 5500 filing problem as well. The statuary fix to the “one bad apple rule” does not fix address this problem.
Among several other examples is the liability for ongoing prohibited transaction exposures, where significant deposits may not been made in a timely manner by the bad acting participating employer. It will takes a while to disgorge that employer from the plan, even if you are able to use that “expedited fix” I mentioned earlier. The statuary fix to the “one bad apple rule” does not fix this sort of exposure for the P3, either
What this tells us is that if Congress and the regulators are serious about making these sorts of aggregated plan arrangements a key solution to solving the small employer coverage problem, there is still much work to be done.