LLC and PEO - will it work?

[Guest mickiemurphy]

I have a 3 partner LLC with all other employees leased through a PEO. The PEO has a 401(k) for which the LLC signs as Co-Employer. All leased employee comp is paid through the PEO. The PEO 401(k) plan is not what is defined as a "safe harbor" 10% pension.

It is my understanding that if the LLC starts a qualified retirement plan, the PEO employees will be included in coverage and compliance testing since they do not benefit from a 10% money purchase plan. Have I misinterpreted Derrin Watson's instructions? Could the LLC start a 401(k) and forget about the employees leased through the PEO?

This client is receiving various advice from vendors seeking their business, including "forget about the leased employees." I need to clarify.

[rcline46]

Believe in Derrin and not those who have a financial interest. Make them give you cites as to why you might ignore the employees. Have them get a written opinion from an attorney that it is ok.

[four01kman]

Include them in LLC plan or a PEO with a 10% contribution. If PEO doesn't have 10% plan, they are to be included in the LLC plan.

[Guest Pensions in Paradise]

Two reasons why the PEO employes MUST be included in the coverage testing.

First, in order to meet the safe harbor exclusion the other plan must be a money purchase pension plan with a minimum 10% contribution rate. So you fail that test.

Second, even if the other plan were a 10% MPP plan, you cannot use the safe harbor exclusion if more than 20% of the non-highly compensated employees are leased. So you fail that test also.

[Ron Snyder]

Even though you have been correctly instructed to include the leased employees (who have more than 1 year of service) in the employer's plan, you may include contributions made to the PEO 401(k) plan in the test, thus potentially enabling the employer to pass the test without including the employees in the employer's plan. (This may require that the employer make a contribution or a matching contribution to the PEO plan in order to pass the test.)

[Guest mickiemurphy]

Thanks one and all!