PEO Questions

[Guest Lex]

There seem to be several questions regarding the conversion of a PEO (single-employer plan) to a multiple employer plan. I have not seen these issues addressed and am hopeful that other have found answers:

1) Can a PEO offer a Mulitiple Employer plan to the common law employees of its clients but exclude the PEO's own employees from participation? If so, how does the PEO meet the definition of Plan Sponsor?

2) May a PEO make a "mid-year" conversion to a multiple-employer plan and not wait intil the Compliance date of 12/31/03? The Rev. Proc seems in one place to indicate that the first effective date for a conversion is 12/31/2003. Other parts of the Rev. Proc seem to say that this is just the drop-dead date and a conversion can come earlier.

3) If a conversion can be made prior to 12/31/2003, assume the transitional relief for ADP/ACP testing (as a single employer plan and not a multiple employer plan) is lost and the testing must be done as a multiple employer plan for 2003?

4) Suppose the PEO will convert 12/31/03 to multiple employer. It sends notifications to COS April1 and they have to respond by June 1. What about new COs that the PEO takes on after April 1- do they add them as part of a single employer plan? How can they, as the notification date is missed? I assume they cannot add them as a participating employer in a multiple employer plan as the plan is not yet a mutiple employer plan. Would the PEO have to set up a separate mutliple employer plan for these new COs in 2003 and then merge that with the converted multiple employer plan after 12/31/03?

5) What if a CO misses the notification date and, according to the Rev Proc, are slated to be put into a Spinoff Plan and terminated later decides they want to make an affirmative election (either to join the PEO multiple employer , or set up their own plan)? Are they just out of luck? Is the missing of the date irrevocable?

Your input on these questions is appreciated.

[Guest Lugeguy]

Having been in the PEO industry for many years I/we only operated a multiple employer plan. The IRS has finally determined that all PEO's who offer qualified savings plans must operate as a multiple employer plan.

The questions you have asked are complex and require a great deal of work on your part.

1. Contact current plan administrator/or 401k sales person and begin the task of switching. Figure out costs and plan on spending a lot of time.

2. Will your single employer plan be able to be converted?

3. Can your current administrator do multiple employer plans?

4. Communicating to all participants will be critical.

Good luck on this major project.

[GBurns]

Have you looked in the Q&A Columns for some input?

S. Derrin Watson has some insights in "Who's the Employer" and there are other insights in "Advanced Plan Design" and "401(k)".

[Guest Lex]

Yes, I checked the Q&A section without any luck.

It seems these issues are not clearly addressed by the IRS.

I wonder what other PEOs and their providers are doing?

[GBurns]

I guess that I do not understand your post.

RE: Whos's the Employer:

Q&A 211 among others answers your Q 1 re excluding the employees of the PEO.

Q&A 182 and others address "mid year" and other conversions.

Q&A 209 etc addresses CO termination.

In general there are multiple Q&As that discuss Rev Proc 2002-21 and its requirements etc, which in turn addresses the questions that you posted.

I found clear answers or discussions to your questions in the Q & A (Who's the Employer, 401(k) and Advanced Plan Design) very very easily.

[alanm]

I think the answers, by the numbers, are as follows:

1. Yes, each employer who wants to participate must adopt. The PEO internal employees can be excluded if the PEO doesn't adopt.

Section 413 says any employer in the group can sponsor a multiple employer plan, since the PEO is one of the group it can be the sponsor.

2. Don't convert and you avoid the testing issue. Sponsor a new multiple employer plan, then terminate the old single plan 12/31. Transfer clients in blocks month by month into the MEP to ensure a smooth transition. Otherwise it will be a mess.

3. Probably lost and should be tested as a multiple.

4. New COs would be better served by going into a new multiple plan that would be run concurrently with the single plan. Again, this would ensure a smooth transition. You can't really put them in the single and administrate them as multiple client before the conversion date.

5. There is no guidance for this situation. I think the practical procedure is to transfer them to the newly adopted plan from the spinoff any time before distributions occur.