PEO and controlled group Issue(s)?

[Guest tintree73]

Ok, here's a new one. My company is part of a controlled group with 3 other companies. There is currently one plan that covers 2 of the organizations and a third plan that covers the 3rd organization. No QSLOB, we test the entire group.

Issue: One of the companies now wants to switch to a PEO model. Here's the question(s): (1) if they do that, could they (a) keep those PEO employees in the plan that is currently covering them (the company would be the employer by control, etc.), and (b) if so, would that affect the testing for the plan in any way?

or

(2) could the company using the PEO model terminate their particpation in the plan they are currently in (with proper amendments, corp. resolutions, etc.) and then particpate in the multiple employer plan sponsored by the PEO (per RP 2002-21). And, if they do the second option, how would testing work from the PEOs perspective and from the controlled group's perspective.

Also - (option 3) couldn't the PEO client organization sponsor their own plan, handle testing on a controlled group basis and not worry about the PEO?

Please help! What do you think?

[Guest Mrilaomt]

I would say that the PEO Client organization could amend itself out of the controlled group plan and either maintain its own plan and face testing on a controlled group basis or move its employees in to the PEO's plan and the PEO would have to deal with the testing issues.

But I think it would hurt the rest of the PEO Client Organization's controlled group testing.

[Alf]

All of your proposed answers sound correct. The company in question will be the employer of the employees, in the controlled group with your company, and will be unrelated to the PEO both before and after the outsourcing. The only proposal that could cause problems is if they adopt the multiple employer plan and the benefits of that plan and the demographics of that company cause coverage or nondiscrimination testing problems.

[Guest boston431]

Ok, so does that mean that if the client organization stays in the controlled group plan that it was in prior to going to the PEO (let's call it plan 1), then plan 1 would have to do the coverage/ND testing as it was done before (using all the employees in the controlled group, including the client organization members of the PEO).

AND

If the client organization amends itself out of the old plan (plan 1) and begins sponsoring its own plan (lets call it plan 3 because there was another plan in the controlled group mentioned in the original post), then Plan 3 (as well as plan 1 and plan 2) would have to test for coverage/ND using all the employees in the controlled group (including the employees of the client organization) and pass that way.

AND

That if the client organization amends itself out of the old plan (plan 1) and begins participating in the PEO plan, that plan 1 and plan 2 (which are still part of the controlled group) would have to run coverage/ND testing as they did in the past - using all employees of the controlled group, including the client organization. But how would the PEO test with regard to the client organization? Would it test as though the client organization was a single plan and take all members of the client organization (all 3 entities) into account when doing the coverage/ND testing?

I'm new to this so please let me know if I am wayyyyyyy off base here.

[Alf]

I believe the first part of Boston's reply is correct. I believe the second and third situations will generally have identical results, with the clarification that the rules of Code Section 413© regarding the testing of multiple employer plans (sometimes one plan, sometimes separate plans) will apply to the third situation.

[Guest tintree73]

Would the same reasoning apply to the cafeteria plan and welfare plan benefits - as it is my understanding that the exclusive benefit rule would not apply to those benefits?

Also - don't cafeteria plans (premium conversion and health FSA) have to be offered to all employees in the controlled group - so if they started their own plan they would violate that rule (as well as if the client organization participated in the PEO's cafeteria plan)?

How would IRC 125(d) impact all of this?

[Guest boston431]

I'm seeing contradictory information on the cafeteria plan side. Here's some of what I found:

http://www.benefitslink.com/boards/index.p...st=0entry2555

http://www.benefitslink.com/boards/index.p...t=0entry22057

http://benefitslink.com/modperl/qa.cgi?db=...employer&id=178

It seems as though they are saying: if the PEO is the common law employer tahn all the nondiscrim testing, reasonable availability requirement are done at the PEO level.

However, if the PEO is not the common law employer (i.e., the client organization meets the IRS three factor test - which used to be the 20 factor test), then there seem to be issues with IRC 125(d) (because that section only allows employees of the employer to be in the plan - and therefore the client organization employees participating in the PEO plan would be taxable because the PEO is not the common law employer of those employees).

However, I am confused by the language that "if the PEO is the agent" of the client organization this may be "ok" given a public policy argument.

Would all this leave us with our options being - that if the client organization is the common law employer of the employees, then the client organization could 1. stay in a cafeteria plan that is already covering employees in its controlled group (and hope to pass ND), 2. leave the controlled group cafeteria plan and sponsor its own plan (and run the risk of failing coverage or ND testing), or 3. join the PEO's master cafeteria plan - but run the risk of the benefits being taxable to both NHCEs and HCEs, as well as the plan possibly being a MEWA under state law (and I am in NY and I don't think MEWAs are technically allowed?).

Please let me know if I am attacking this the wrong way.