Professional Employer Organization

[DLavigne]

Hello. We have a situation I haven't experienced before and need some assistance. A small company that has a 401(k) we administer (I'll call it Small Co., since I'm not very creative) was recently purchased by another company (Big Co.) that is a member of a PEO. Big is part of the PEO's 401(k) plan and tells us that the employees of Small cannot participate in it.

1. Can the existing Small 401(k) be amended so that Big Co. becomes the plan sponsor and the plan will continue to cover just the Small employees?

2. Can it be run and maintained separately, or is it similar to a controlled group situation in that the PEO's plan and the plan maintained for the Small employees must be tested together?

3. Is there anything else I should know about this situation?

Thanks a lot. I hope never to have to deal with PEO's again after this!

[ERISAnut]

1) This may not be necessary. If Small is still the employer, but merely a wholly owned subsidiary of Big Co. then Small may remain the sponsor. Just ensure that the document requires co-sponsor adoption for employees of other members in a related group get covered.

2) Same as above. They may be maintained and tested separately. They may also be maintained separately and permissively aggregated for testing purposes.

There nothing magical about it once to keep an accurate perspective on who the employer (and related employers) are. Everything else is simple coverage tests.

[DLavigne]

Thanks for your reply. In this case, Small is no longer the employer - the company was sold to Big. How does that change your response?

[RCK]

You need to look at how the Small Co plan defines eligibility and make sure that definition is consistent with the new situation.

So if everyone is paid under the Big Co EIN, and the Small Co is distinguished by a location code in your payroll system, or a geographical location, then define it that way in your plan.

You do need to make sure that you meet the participation requirements of 401(a)(26) and the coverage rerquriements of 410(b).

[ERISAnut]

True.

The part to be distinguished here is whether:

1) Small Company is still a separate employer who is a wholly owned subsidiary of Big Co; or

2) Whether Small Company dissolved into Big Co and is merely a division of Big Co.

If Small Remains a separate employer (as under 1 above) then they will maintain their own EIN. However, if they dissolved into Big Co (as under 2) then they will merely be a division of Big Co and the documents would need to accurately reflect the arrangment.