PEOs, Rev Proc 2002-21 and Multiple Employer Plans

[Guest ubpMR]

I'm a TPA that services 3 plans that are PEOs (Professional Employer Organizations).

I have in the past filed this plans as single employer plans. One in particular has no eligibility, immediate entry, age 18 is only limit. The HCEs are tremendously limited (they can ususally only defer around 1% as participation is poor).

If I reading this Rev Proc right, the bottom line is that this plan, and all PEO Single Employer plans have to be terminated or converted to Multiple Employer plans. Does everyone concur?

I know that congress tried to pass legislation on PEOs last year but it didn't go through so the IRS jumped in with this Rev Proc but is everyone jumping on this bandwagon or should we wait for congress to pass a bill superceeding this?

Comments are welcome and appreciated. This is a very good link for info

http://employerbook.hypermart.net/index.html

[alanm]

I suggest you jump, congress is not going to superceed.

[KJohnson]

I also suggest that you terminate rather than covert to a multiple. Look at the "Who's the Employer" Q&A's on Benefitslink. There are a number of Q&As on the new Rev. Proc. In particular you might be interested in this one:

Rev. Proc. 2002-21 Relief For Multiple Employer Plans

(Posted May 6, 2002)

Question 173: With regard to a PEO "single employer" plan, does the new revenue procedure provide any relief from possible violaitons of 410(B), ADP/ACP and the like? Most of it deals with the exclusive benefit rule but there is a special rule for terminating plans in Section 4.03; if a single employer PEO plan terminates, does it get a complete pass on all of these other compliance issues?

Answer: This is one of the most awkward parts of Rev. Proc. 2002-21, and I allude to it in Q&A 166.

As part of the relief offered by the Rev. Proc. to PEO Retirement Plans that comply with its provisions, Section 4.03 says:

For the purpose of determining whether a PEO Retirement Plan or Spinoff Retirement Plan satisfies the qualification requirements in § 401(a) upon plan termination (as described in section 5.06), Worksite Employees may be treated as if they were employees of the PEO.

I spoke with the author of the Rev. Proc., and she said that this clause was intended to apply to all compliance issues, not just to the exclusive benefit rule. (Of course, that isn't binding on the IRS, but it is a reasonable interpretation.)

That doesn't amount to a free pass, however. It simply says, in effect, that if you have been testing the plan hitherto as though the Worksite Employees were employees of the PEO, you don't need to rerun those tests for purposes of determining whether a terminating PEO plan or spinoff plan is qualified.

You are correct; there is no comparable clause for a PEO that chooses to convert its plan to a multiple employer plan. I give a detailed example of why this is a problem in a multiple employer plan in Q&A 165. Continuing that example, if that same employer were to terminate its plan instead of converting to a multiple employer plan, there would be no 410(B) issue. The terminating plan would be able to rely on Section 4.03 to insulate it from liability so long as it complied with the Rev. Proc.

What issues would be covered by Section 4.03? Any issue in which it makes a difference whether the PEO or its client is the employer. So it would deal with 410 participation and coverage, 411 vesting, 415 limits, 416 top heavy rules, 401(k) distribution restrictions, the ADP test (both for purposes of determining whether the plan satisfies 401(a)(4) and for purposes of determining whether the 401(k) feature is valid), the ACP test (again, both for nondiscrimination and for testing the validity of the match), safe harbor 401(k) issues, etc.

The lack of any such comprehensive provision for a continuing plan that converts to multiple employer status is a major disincentive for adopting such plans. This is one of many questions and issues the IRS should resolve as it considers future guidance on this issue.

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