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When SIMPLE IRA plans aren’t so simple

Following an acquisition, can a business owner continue to offer both a SIMPLE IRA and a 401(k) plan at the same time?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Texas is representative of a common inquiry related to savings incentive match plans for employees (SIMPLE) IRA plans. The advisor explained: “A CPA that I network with had a small business client that maintained a SIMPLE IRA plan. The CPA’s client purchased another business in 2018 via a stock acquisition. The acquired business brought with it a 401(k) plan.”

Highlights of the Discussion

Because of the circumstance (i.e., an acquisition) an exception to the “exclusive plan rule” for SIMPLE IRA plans applies.  Among the employer eligibility rules for maintaining a SIMPLE IRA plan is the exclusive plan rule. In general, a single employer may not maintain a SIMPLE IRA plan in the same calendar year it maintains any other type of qualified retirement plan.[1]

In the situation noted above, the merger of the two businesses results in one employer with two plans (a 401(k) and SIMPLE IRA plan) during the same calendar year. Fortunately, a temporary exception to the exclusive plan rule is available. The temporary exception allows the merged businesses to maintain another plan in addition to the SIMPLE IRA plan during the year of merger or acquisition, and the following year as long as, only the original participants continue in the SIMPLE IRA plan (See Q&A B-3(2) of IRS Notice 98-2).

Let’s use this situation as an example. The ownership change occurred in 2018. The SIMPLE IRA plan can be maintained in 2018 and through 2019, along with the 401(k) plan, without running afoul of the exclusive plan rule. Before 2020, however, either the SIMPLE IRA plan or the 401(k) must be terminated.


Acquisitions and mergers involving multiple retirement plans can complicate SIMPLE IRA plan operations due to the exclusive plan rule. It is important to be aware of the transition rule in these scenarios.

[1] Another plan would include a defined benefit, defined contribution, 401(k), 403(a) annuity, 403(b),  a governmental plan other than a 457(b) plan, or a SEP plan.

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Much Ado About MEPs

by W. Andrew Larson, CPC

Multiple employer plans (MEPs) are consistently in the news. Their proponents, which include a bi-partisan Congressional group, claim MEPs can offer small and mid-sized employers the advantage of lower administrative and investment costs as they relate to offering employer-sponsored retirement plans, and would expand worker access to such savings arrangements. One would think that an arrangement that helps expand affordable, employer-sponsored retirement plan coverage would be a no-brainer and encouraged at all levels. Alas, policy issues are rarely this simple.  In light of the heightened level of industry interest, we thought it timely to discuss MEPS, including what they are, where they came from and prognosticate on where they might be going.

A MEP is a retirement plan adopted by multiple employers. (Not to be confused with a multi-employer plan, which is a plan maintained pursuant to a collective bargain agreement between more than one employer and a labor union. These plans are sometimes referred to as “Taft-Hartley” plans. Please see our “Case of the Week” Multi and Multiple Employer Plans–What’s the Difference? for a more in-depth comparison.)

A MEP is a qualified plan adopted by multiple business entities none of which are part of a “controlled group of businesses.” Understanding the controlled group dimension is important because multiple businesses may adopt a plan and yet the arrangement would NOT be considered a MEP if the businesses where part of a controlled group of businesses. Essentially, a controlled group of businesses exists when multiple business entities have a certain level of common ownership among them.

Another element in understanding the MEP environment relates to the various Federal entities involved with MEP oversight and regulation. Retirement plans are subject to oversight by the IRS, the Department of Labor (DOL) and, in some cases, the Securities and Exchange Commission (SEC). Each agency is focused on its own policies and rules, and coordination is often lacking. Much MEP confusion (and contention) occurs because of the lack of regulatory coordination between these entities. This results in odd situations; for example, a MEP arrangement can satisfy IRS rules and, simultaneously, run afoul of DOL or even SEC requirements. Next, let’s explore how the confusion with the rules that govern them arose and what might be some possible resolutions.

Traditionally, the IRS was comfortable with, if not supportive of, MEP arrangements. In fact, this author was involved in obtaining approvals from the IRS for MEPs in the 1980s. If certain criteria were met, the IRS considered a MEP a single plan requiring one Form 5500 filing and audit despite the fact many employers were participating in the arrangement.

Historically, the DOL had little involvement with MEPs. Things changed, however, starting around 2010. The DOL became increasingly concerned about MEP arrangements and possible abuses. It didn’t help MEP supporters when, at about the same time, a high-profile, politically-connected, California-based MEP provider was found guilty of embezzling MEP assets.

In 2012, the DOL issued MEP guidance that had a major impact on these arrangements (see Advisory Opinion 2012-04A). First, the DOL decreed that a MEP arrangement must have a “nexus” or commonality between the adopting employers in order to be considered a single plan. For example, if all adopting entities were dental offices a nexus would exist. The origination of the nexus requirement is obscure as nexus is neither mentioned nor alluded to in the IRS MEP code or regulations [under IRC Sec. 413(c)]. I have heard it said the nexus requirement is important to prevent abuses yet, when pressed, the proponents of this view could neither articulate the abuses nor explain how nexus would solve them. For terminologies sake, a MEP without a nexus is commonly called an “open MEP,” and a MEP with a nexus is a “closed MEP.”

Why is open or closed MEP status important? Recall the IRS considers a MEP a single plan and subject to a single Form 5500 and audit requirement. The DOL’s view is, unless a nexus exists, the arrangement is considered a combination of single employer plans and each employer would need to file its own Form 5500 and audit report, when applicable. The IRS was comfortable with treating a MEP as a single plan regardless of nexus, while the DOL insists on nexus if the arrangement is to be considered a closed MEP and treated as a single plan.

And let’s not forget about our friends at the SEC. They may want to play in the MEP regulatory sandbox. Recall that under a MEP, unrelated employers pool their retirement assets in the plan’s trust. This pool of assets might be considered a mutual fund for purposes of the Investment Company Act of 1940, and subject to registration and reporting requirements.

Another MEP requirement that draws concern is the “bad apple” rule. The bad apple rule calls for disqualification of the entire MEP if just one of the adopting employers fails to satisfy the IRS compliance rules. Losing qualified status means the participants are taxed on vested benefits and plan sponsors may lose deductions. Yes, the “bad apple” rule sounds scary, but let’s consider what has happened in the real world. It is not the policy of the IRS to disqualify plans except in the most egregious situations of plan sponsor malfeasance. The IRS prefers plan problems be fixed via its Employee Plans Compliance Resolution System (EPCRS). To my knowledge, a MEP disqualification because of the bad apple rule hasn’t yet occurred and I don’t think that it will.

It seems clear MEPs have the potential to create economy of scale and help place small employers on more equal footing with larger employers in terms of administrative costs and features. Industry benchmarking data is clear that small employers’ plan operation costs are higher than larger employers’ costs, and one solution could be a MEP. A MEP allows employers who were not part of a controlled group to participate in a single retirement plan and save money on plan costs and get better pricing from investment providers.

Clearly challenges remain. For example, several years ago a large trade association was fined millions of dollars by the IRS because the IRS contended the nature of the  MEP arrangement was such that the trade organization was in control of the MEP and could, and did, set its own compensation from the arrangement. This was clearly abusive, yet solutions exist to mitigate these types of abuses.

In this era when expansion of retirement plan access and coverage is becoming a common call in public policy, and many efforts are being made to expand retirement plan availability while reducing costs to employers, the author is perplexed at the seemingly artificial impediments to MEP creation. In fact, several bills before Congress would enhance the attractiveness of MEPs. The bills make it clear no nexus would be required, and they would also do away with the all or nothing bad apple testing requirements. At the time of this writing, the fate of these bills is unclear. We sincerely hope legislation that expands retirement coverage and reduces costs for small employers and their participants can be something both political parties support.

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Annuity provider selection safe harbor for defined contribution plans

“Has the Department of Labor (DOL) issued guidance on how to prudently select annuity providers for a defined contribution (DC) plan?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.  A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to annuities within defined contribution plans.

Highlights of the Discussion

Yes, the DOL has described a five-step, “safe harbor” procedure for plan sponsors and their advisors to follow in order to satisfy their fiduciary responsibilities when selecting and monitoring an annuity provider and contract for benefit distributions from DC plans. (Note: The DOL is contemplating proposed amendments to the annuity selection safe harbor related to the assessment of an annuity provider’s ability to make all future payments.)

According to DOL Reg. 2550.404(a)-4, issued in 2008, and as further clarified by DOL Field Assistance Bulletin 2015-02, in order to satisfy the safe harbor selection process a plan fiduciary must

  1. Engage in an objective, thorough and analytical search for the purpose of identifying and selecting providers from which to purchase annuities;
  2. Appropriately consider information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract;
  3. Appropriately consider the cost (including fees and commissions) of the annuity contract in relation to the benefits and administrative services to be provided under such contract;
  4. Appropriately conclude that, at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract and the cost of the annuity contract is reasonable in relation to the benefits and services to be provided under the contract; and
  5. If necessary, consult with an appropriate expert or experts for purposes of compliance with these provisions.

The safe harbor rule provides that “the time of selection” means:

  • the time that the annuity provider and contract are selected for distribution of benefits to a specific participant or beneficiary; or
  • the time that the annuity provider is selected to provide annuities as a distribution option for participants or beneficiaries to choose at future dates.

The fiduciary must periodically review the continuing appropriateness of the conclusion that the annuity provider is financially able to make all future payments under the annuity contract, as well as the reasonableness of the cost of the contract in relation to the benefits and services to be provided. The fiduciary is not, however, required to review the appropriateness of its conclusions with respect to an annuity contract purchased for any specific participant or beneficiary.


Similar to selecting plan investments, choosing an annuity provider for a DC plan is a fiduciary function, subject to ERISA’s standards of prudence and loyalty. One way to satisfy this fiduciary responsibility is to follow the DOL’s safe harbor selection process as outlined in DOL Reg. 2550.404(a)-4 and Field Assistance Bulletin 2015-02.

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