3769 / What is the ‘one bad apple rule’ and why do business owners interested in the MEP structure need to be aware of it?
Prior to 2019, under the “one bad apple rule,” (or “unified plan rule”) the entire MEP could be disqualified based upon the actions of only one employer that participated in the plan—based upon the assumption that the MEP is to be treated a single unified plan.
In 2019, the IRS and Treasury proposed rules that would mitigate the potential impact of the rule.1 The SECURE Act finalized those rules by eliminating the one bad apple rule in certain situations.2
The SECURE Act provides that if one employer’s actions would disqualify the plan, only that employer’s portion of the MEP will be disqualified. Under the new rules, in the case of one participating employer’s failure to act in accordance with the qualification rules:
(1) the assets of the plan attributable to employees of the employer will be transferred to a plan maintained only by that employer (or successor), to an eligible retirement plan under Section 402(c)(8)(B) for each person whose account is transferred (unless the Treasury determines that it is in the best interests of the participant for the assets to remain in the plan), and