PEO/Form 5330 situation

[Guest Robin Vatalaro]

Maybe this is a dumb question. PEO handled all benefits of XYZ, Inc. including 401k plan. 2001 ADP test fails, refunds processed after 3/15/02. Who pays the excise tax? The PEO or XYZ?

Thanks for any help.

[Guest b2kates]

Absent a specific contract agreement, I would say liability is with the plan sponsor.

[alanm]

The PEO pays and the PEO submits the form

[GBurns]

Why the PEO?

Are you saying that the PEO is the plan sponsor or that the IRC recognizes an alleged co-employer arrangement?

If the PEO is the plan sponsor, what is the relationship of this plan to the other plans that are co-sponsored with other clients? Would not a multiple-employer situation have created a MEWA or multiple employer plan instead of a single employer plan?

[alanm]

In a PEO multiple plan, the PEO is usually named the Administrator. Fiduciary liability boils down to functionality and the PEO, as adminstrator and Trustee, hires the TPA who tests the plan and provides the payroll information. Delays in refunds that are no fault of the client company are clearly the liability of the PEO. If the PEO falters in their responsibility and can't pay the fine, the client companies, or co-sponsors, are the next in line to pay. The clients have no power to unilaterally terminate or merge or amend the plan, only the PEO as administrator has that right as specified in the plan document. If the PEO does not correct an operational defect such as not making refunds, technically the whole plan with all the co-sponsors can be disqualified. Since the PEO files the 5500 and administrates the plan, they also must file the 5330 and pay the fine. Afterall, the client didn't engage the TPA or setup the trust nor does the client have the power to order distributions and refunds.

[GBurns]

What makes this PEO able to offer a legitimate plan in the first place, whether it be "multiple plan" (whatever that is) or any other plan?

Are you claiming that this is allowed under the IRC and state laws? If so, which ones?

[alanm]

IRC section 413

[Guest Tom Geer]

The most consrvative view of PEO plans is that they are "multiple employer" plans, under 413, as alanm points out. That means that each separate client is a separate testing group for all purposes, like 401(a)(4), 401(k), 401(m), etc.

The PEO is probably the plan administrator, which gives them the obligation to correct the 401(k) failure by causing "refunds" to be paid from the plan, thus alanm's and b2kates's comments about primary responsibility.

Really, this is best analyzed as a payroll tax issue, rather than a retirement plan issue, which makes it the primary task of the "responsible person" under the payroll tax rules. Again, this is probably the PEO as employer, as payroll agent or as common paqymaster (withholding terms).

However, all of this is ERISA/tax analysis, and concerns who the IRS can go after. The liability as between the PEO and its client will ba a function of the contract between the parties. Since most PEOs use a form contract they have written, and given the pointers in ERISA and the Code towards the PEO, if the contract is ambiguous the PEO is probably stuck.

[GBurns]

The reason why I question the ability of nearly every PEO to offer benefits is because of the extensive "literature" available outside of PEO promoters that questions that ability. This literature includes many state DOI warnings and bulletins regarding employee benefits offered by PEOS and the possibility of causing a MEWA. The society of Professional Benefit Administrators also has warnings and explanations such as http://users.erols.com/spba/p0000035.html

There are also a number of questions on the Q & A of Benefitslink under the 401(k) Plans, Advanced Plan Designs and Who's the Employer. The Q&A are all written by legal professionals who have researched the issue and have all seemed to come to the same conclusion that it is very unlikely and very difficult for a PEO to legitimately offer such benefits. As the NJ DOI points out it is possible but the threshold for compliance is so high that it is unlikely that any will reach it.

Here are a few of the Q&A:

http://www.benefitslink.com/cgi-bin/qa.cgi...id=41&mode=read

http://www.benefitslink.com/cgi-bin/qa.cgi...id=64&mode=read

http://www.benefitslink.com/cgi-bin/qa.cgi...who_is_employer

http://www.benefitslink.com/cgi-bin/qa.cgi...id=42&mode=read

[mbozek]

Has any one read the regs? Reg. 54. 4979-1(a)(2) states that the employer has the liability for paying the excise tax unless the plan is collectively bargained. The rules for cb plans do not apply to multiple employer other plans subject to IRC 413©. Reg. 1.413-2(a)(3)(i). Each employer who participates in a multiple employer other plan is reponsible for maintaining the qualification of the plan for its participants. Reg. 1.413-2(a)(3)(ii). The employer who owes the tax must file the form and pay the tax. The downside of using a third party to administer or operate such a plan is that the plan sponsor retains liability for the actions of the administrator. A few years ago the US Supreme Ct. held that that the executor of an estate was personally responsible for any mistakes filed on an estate tax return prepared and signed by an attorney for the estate because the executor was designated as the responsible party under the tax law for filing the return.

[alanm]

This discussion seems to have escalated into an esoteric debate over whether PEOs are legal or not and Robin's question has been lost. Robin, as TPA for a lot of PEO Multiple Employer plans, I have been involved in numerous audits on this subject and I feel confident that the PEO can and should send in the 5330 and the penalty check. The IRS has never raised any question as to this procedure, they just want the penalty paid.

[Guest Robin Vatalaro]

Amen (just kidding)! Thanks for everyone's help.