The PEO situation should not be confused with the rules which require those who have met the definition of Leased Employee to be counted as employees of the plan. Within the definition of Leased Employee is the exception for the leasing agency which provides a 10% money purchase benefit. A PEO should not be viewed through the Leased Employee rule lens. That will take you down the wrong path.
A PEO is considered to be the employer for payroll purposes (paying wages and filing Form W-2) and it may sponsor a MEP which its clients adopt as participating employers. However, the PEO's client (here, the laundry) is considered to be the employer, too. This is a unique concept of co-employment that is widely misunderstood.
The laundry is the employer that provides the workplace, the direction and control of the employees. It also is the sponsor of a retirement plan for those employees -- as a participating employer in the PEO MEP. The portion of the MEP that covers the laundry is a plan in the controlled group with the original S-corp.
Just take it from there and apply all the controlled group retirement plan rules to the S-corp plan and the laundry's portion of the PEO MEP.
