Takeover of employees by PEO

[Guest Thornton]

Company A has affiliated with a PEO, who will hire all employees, including the owner, and lease them back to Company A. The PEO will provide all health, welfare and 401(k) benefits. Company A will terminate its 401(k) plan, and will make distibutions to all participants. Question: Is there a distributable event? Do the amendments to the same desk rule allow for this? Has there been a "severance from employment?" Thanks.

[alanm]

There is no separation from service by hiring a PEO. The employees will probably still be common law to the worksite employer not the PEO. It may be possible for A to terminate the plan and give distributions, however- that is if A does not sponsor another plan with 12 months nor allow their employees to participate in a PEO plan. Under the REv Proc. 2002-21, only the PEO, multiple employer plan is acceptable to the IRS, meaning the worksite must adopt it.

[Guest Thornton]

I agree with your conclusions. We clearly have a violation of the exclusive benefit rule. However, my reading of section 4.01 alone and in context with the entire Rev. Proc. leads me to conclude that the IRS will not disqualify either the PEO's or my soon to be former client's plans if the PEO either amends to a multiple employer plan or terminates its single employer plan by December 31, 2003. My client can then adopt the mutiple employer plan without it being a successor plan if such adoption occurs more than 12 months after the last distrbution was made from its current plan. Any other thoughts out there?

[alanm]

This is true assuming the PEO is currently running a single employer plan and not a multiple.

[MJ Hartman]

does anyone have any insight as to the issues as to amending a peo plan to a multiple employer plan? I realize that this will require a multiple er document and individ. letter of determination. As long as our software can be set up to test separate "divisions" and we file individual 5500's should we be concerned with any other "quirks"? This would seem to be a lucrative source of income if done correctly and priced sensibly. Any comments would be appreciated.

[alanm]

There are too many quirks to discuss here. I run a PEO, multiple employer, plan crash course to train administrators. The next one is July 11- see slavic401k.com for the details.