PEO's

[Belgarath]

Anybody know much about these? I know what they are, and the theory, but I'm having trouble justifying some of what is going on with regard to qualified plans, and maybe the IRS has provided guidance I don't know about!

We had a client who is a PEO. Member companies would sign a contract with the PEO, and essentially "terminate" their employees, and hire them back from the PEO. The PEO has no right to hire and fire them, cannot direct their work, hours, etc... essentially they are a payroll service. They wanted a 401(k) for the PEO, and then individual companies would have a cross-tested plan covering only the keys, while the non-keys would participate in the 401(k).

We told them to go find another TPA. But I'm curious as to what other folks out there think of this type of arrangement, and whether you are aware of any IRS guidance regarding PEO's and their sponsorship of qualified plans. Thanks in advance.

[Erik Read]

My best suggestion - I know enough about them to be dangerous as we all say - is that TransAmerica has developed a program specifically for PEO's - it's the only one that I know of. If anyone know of another vendor that handles these smoothly, please post them here.

PEO's get complicated very quickly. The definition of an employee is difficult in these situations, and best left to an ERISA attorney. I'd refer the client to an attorney, and work with them to design a program that works for all parties.

Good Luck!

[Guest SheilaLuken]

I work for a PEO and submit that a PEO that does not retain the right to hire and fire cannot be the "employer" of the employees in question. You are correct-they are simply a payroll service. PEO's who operate as true co-employers retain hiring and firing rights as well as other human resources functions. In addition, the PEO's that I know, including ours, are very careful to not allow abusive situations by clients in order to circumvent the rules of qualified plans.

[MWeddell]

I researched PEOs for a client a few months ago and concluded (1) there is no IRS guidance specific to qualified plan issues about PEOs that I could find, and (2) there are compliance risks in assuming that the PEO, not the worksite employer, can contractually be designated as the employer for qualified plan purposes.