Peo with a 401(k) question

[abanky]

I don't normally deal with 401(k) so forgive the terminology.

We have a Peo who is currently with a single-employer non-safe harbor 401(k) plan. The Peo had a five year cliff vesting but now has a 3 year cliff for the 2002 plan year. Most of the companys that are now under the Peo's umbrella had merged their plans with the Peo. If a company with a 6 year vested schedule merged with the Peo in 2000 (service for participants starts from initial employment with company not Peo) and went belly up this current year,What is the best way to approach distributions? forfeitures?

If a person had two years of service in the company, would he be vested on match 20%? or would he be 0% vested? or would all employees be automatically vested?

If there is a forfeiture, where would it go? back to the company (which no longer exists) who matched it?

Thank you

[Fredman]

this sounds like a possible partial plan termination, which would mean the affected participants would become 100% vested and be eligible for distribution.

i'm sure others will add sound advice/comments, but i think your best bet would be to seek out a professional (perhaps the plan's recordkeeper) that can review all of the circumstances and come up with the correct solution to your question.

[abanky]

the bankrupt company participants makes up less than 2% of the total participant count for the peo, would that be a big enough percentage of participant to do a partial termination

[jaemmons]

Keep in mind that these plans are looked upon as multiple ER plans. The participating employers are "co-sponsors" to the plan when they sign and execute a participation agreement, and as such if a participating er goes bankrupt, I believe you have a partial plan termination with respect to that er and would fully vest all plan participants. Since the employees of each employer are recognized individually for most plan purposes, a partial plan termination determination would need to be done on an employer by employer basis.

[alanm]

Look at the new REv PROC 2002-21. PEO single plans are not multiple employer plans. Therefore, the client could not merge into the single because the PEO is a different employer- only rollovers or voluntary direct transfers should have been allowed. This means all the money transfered into the PEO plan should have been 100% vested. Employer contributions after becoming participants in the peo plan could possibly be under the 3 yr cliff.

The plan document may deal termination of service due to a client company going bankrupt requiring 100% vesting.

[GBurns]

alanm raises the important issue .. Is there really a plan?

The original post said that the plan was a single employer plan by the PEO. Therefore the clients who joined would create multiple employers joining a single employer plan. This sounds like a disqualification which would mean that there really is no plan.

So whether it was a merger, transfer or rollover, it might have been to an ineligible plan.

I would seek competent legal advice from someone not connected with the PEO or plan.

[Guest ndt123]

I wouldn't jump to the conclusion that there is a disqualfying event. PEOs have some time before they need to treat their plans as single employer plans under the rev proc (as late as teh end of the 2003 PY). The Rev Proc deatils the steps a single ER peo needs to go through to avoid disqualification, and provides transitional relief.