Participating Employer / Affiliated Service Group

[mming]

Company A has sponsored a PS plan that has covered many employees for several years. A 25% owner of co. A also owns 95% of company B, which never had any employees. Co. A figures out that its workers comp premiums would be much less if they show all of the employees working for co. B and on 1/1/11 start having co. A pay all payroll amounts to co. B, who in turn pay the employees (and, I assume, the owners). This would appear to indicate that everyone's employment terminated at co. A and they were hired by co. B on 1/1/11, and that the "same-desk" rule is not invoked since neither co. A or its assets were sold. If this is correct, all of these employees are now allowed to receive distributions even though they're working at the same location doing the same job they had before 1/1/11.

Co. A is still in existence, at least on paper, and its 3 owners haven't yet decided whether they would like to keep the plan and continue providing benefits to the employees (they may still decide to keep making small contributions in the future). If they want to keep it going, I suppose the plan can be amended to include co. B as a participating employer. Although both companies once in a while work together to perform services for third persons, each company provides less than 5% of the other company's revenue. And since providing payroll services is not a service historically performed in the service field of co. B, it appears that an affiliated service group situation does not exist.

Althought the payroll arrangement may not be legit, is it correct to consider all of the participants to now be terminated employees and the plan will not have any new participants until co. A starts paying the compensations? All help is greatly appreciated.

[Ron Snyder]

I would choose NOT treat the participants (and the plan) as terminated, pending clarification from the clients. The facts don't seem to indicate that the employees were fired by one group and hired by another, only that payroll functions were passed from A to B. Did A give up all of its revenues to B also?

I would demand that A (your client) provide you will full documentation of the transaction. If there was no sale of stock or business, why was there a transfer of employees in the first place?

Why don't we all simply have strangers hire and pay our employees so we can leave them out of our plans? Because no strangers would do so unless there were some contractual or legal arrangement that clarified what was going on.

[mming]

Thank you for your response. The transfer of employees occurred because co. B has fewer workers comp claims than co. A, so they can save on wc premiums if they show the employees working for co. B. Initially, their cpa likened the new arrangement to co. A subcontracting their payroll function to co. B, but I'm guessing if that was true they would still be considered co. A employees and the wc premium issue wouldn't change.

Since my original post I have been told that the cpa has recommended that about 3/4 of the employees be shown as terminating their employement with co. A, as they continue to be paid by co. B only. This seems to have somewhat clarified how this should be handled. However, I imagine this would result in a partial plan termination causing the terminated employees to be entitled to 100% vesting.