Multiple employer PEO 401(k) plan: employer withdrawal triggers perman

[Guest FAQ]

A PEO sets up a multiple employer, non-union 401(k) plan in 2002. More than 10 employers sign on as sponsors, but 2 employers later terminate their contracts with the PEO and want to withdraw from the multiple employer plan (also in 2002 - the same year that the plan was started).

Treas. Reg. 1.413-2(a)(3)(iv) states that "the failure by one employer maintaining the plan...to satisfy an applicable qualification requirement will result in disqualification of the Section 413© plan for all employers maintaining the plan."

1.401-1(B)(2) provides the permanency requirement and requires "business necessity" if a plan is terminated after a few years.

Question: Since a single employer plan would violate the permanency rule under these circumstances (barring business necessity), would the qualified status of the entire plan be in jeopardy as a result of a termination of sponsorship of the plan by one or more of the participating employers?

Or would the partial termination rules apply to the plan as a whole, whereby there should not be a problem so long as no more than ~ 20% of the employees cease participating in the plan as a result of the withdrawal of the employers from the plan? Only a few employees of the 2 withdrawing employers participate in the plan.

Any other possibilities?

Thanks in advance for any thoughts.

[jaemmons]

I don't see any problem with a participating employer under a multiple employer plan to "terminate" their co-sponsorship of the plan. This shouldn't impact the qualification of the multiple ER arrangement, so long as their "portion" of the plan was compliant with all applicable IRC sections prior to the "withdrawal" of sponsorship.

This is going to happen more with PEO's, since there are contracts involved. I would think that the decision to terminate sponsorship and have the assets withdrawn may be a legit business decision, especially if they have terminated their PEO contract. Many PEO documents I have seen contain language in the supplemental participation agreements related to contract terminations and what happens to participant accounts, as a result.

[Guest FAQ]

A related issue is how the termination of a client organization's sponsorship of the PEO plan should be accomplished. Note that this client organization does not want to sponsor its own stand-alone plan.

One alternative seems to be to have the client organization adopt the plan as a single employer plan, then terminate it. I imagine this would involve filing a Form 5310, etc. It seems to me that any question as to whether the plan was a permanent plan would be the client organization's problem once it became a separate plan. However, in our situation there are only a couple employees of the client organization that participate in the plan, and they've only been contributing to the plan for less than a year. The plan termination administrative costs would probably exceed the account balances.

Another possibility seems to be to amend the PEO plan to remove the client organization as a sponsoring employer. In this case, would the assets of the client organization's employees have to remain in the PEO plan until a distributable event occurs (i.e. termination of the employees)?

[jaemmons]

Since the CO does not want to maintain its own plan, I would have them sign a termination resolution, which should effectively terminate their "sub-plan" and allow for distribution of their employee account balances. Since the employer/employee relationship is between the CO and its ee's and NOT between the PEO and the CO's ee's, the CO can decide to stop it's co-sponsorship of the plan at any time. Also, you don't have any successor plan problems, since the CO will not be sponsoring another plan (either through another PEO or by themselves) outside the current PEO's plan.

Therefore, in my opinion, I would send the termination resolution and distribute account balances. The termination of co-sponsorship is your triggering event under 401(k)(10).

[Guest FAQ]

Thanks, jaemmons.

Two related issues: (1) CO will have terminated its "sub-plan" after sponsoring the plan for less than a year, but there should not be a permanence issue, if termination of the contract with the PEO represents a "business necessity" justifying the termination.

(2) What else, if anything, should be done to document the termination? Should the CO file a 5310 covering its "sub-plan"?

[jaemmons]

There shouldn't be any permanence issue since the decision to terminate the PEO business contract, outside of the plan, due to a legit business decision.

#2 - There is not need to submit a 5310 unless the PEO were terminating the entire plan. A simple term resolution should be sufficient.

[alanm]

there is no regulation or guidance that refers to a "sub plan" in section 413. Read the plan, most mulitple employer plans say that if a CO leaves the PEO it constitutes a termination of participation or discontinuance of contributions. There is no way to terminate part of a multiple employer plan by a CO and get distributions- that plan is on-going. The money is frozen in the plan until the participant terminates at the CO or the CO sets up another plan and transfers(spins off) all the money to that new plan. The new plan treats it as a merger, the old multiple plan treats it as a spin off.