PEO / Distribution

[Guest kgsingletary]

Not sure where to post this, so I'm starting here...

Employee of PEO terminates employment and goes to work for Client Organization of PEO (who sponsors their own plan). Is this considered a distributable event - where the employee can take a lump sum cash distribution from the PEO 401(k) Plan? My confusion comes in where an employee who has worked for multiple Client Organizations of the PEO - you count all years of service. I'm not sure if this works the same and the employee is still considered employed - therefore, there is not a distributable event.

Any ideas of where else I can look are greatly appreciated.

[GBurns]

I guess my first concernwould be whether or not the PEO even had a valid plan in which thie person was participating. Was it a Multiple employer plan and were these other COs co-sponsors etc etc?

[Guest kgsingletary]

Yes, the PEO sponsored a valid Multiple Employer plan. The Client Organizations adopt the Multiple Employer plan by signing an Adoption Agreement. This particular Client Organization, however, did not adopt the Multiple Employer plan - they chose to sponsor their own 401(k) plan separate from the PEO.

[Alf]

In a normal multiple employer plan, it should be a distributable event for an employee to transfer from one employer to another I believe. Years of service among unrelated employer in a multiple employer plan are required to be aggregated under 413©, however, the 401(k) rules are run on an employer-by-employer basis. It prevents one employer from having to keep up with what another employer is doing.

Your situation is awkward, however, because the IRS PEO guidance will apply. If this client organization did not elect to adopt the multiple employer plan, then the accounts of this CO should be spun off to the CO plan or terminated before 1/1/04. It sounds like all the parties have done is to recharacterize the employee's employment as with the CO and not the PEO. If that is all they did, it should not be a distributable event, otherwise the IRS PEO guidance would not require the spin-off and termination procedures.

If this really was a PEO employee originally (a corporate employee of the PEO and not a worksite employee) the answer would be different and a distribution should be allowed.