Severance from employment in multiple employer plan

[Guest hb95]

When a co-employer terminates its relationship with a professional employer organization and discontinues participation in a multiple employer plan maintained by the PEO, does a severance from employment occur, thus triggering a distributable event under 401(k) for the individuals that are still employed by the now former co-employer? My thoughts are that this is a severance from employment because the employees of the former co-employer cease to be employees of the PEO that continues to maintain the plan.

Any other thoughts? Is anyone aware of any IRS guidance relating to this scenario?

Thanks.

[Trekker]

The following language has been in our approved VS specimen plan for years:

"If the Employees of the withdrawing Participating Employer cease participation in the Plan as a result of the withdrawal, the employment of such Employees shall be considered terminated. Distribution of the vested account balance of each such Employee shall be made in the same manner and at the same time as provided in Section ___. The non-vested account balance of each such Employee shall be treated as a forfeiture in accordance with the provisions of Section ____."

Hope this helps.

[austin3515]

Are you setting up a new 401k plan for the participants? If so, then the distributions from the PEO plan would not be eligible for rollover. I think that is the biggest hurdle.

I'm not sure if discontinuing participation is the same as a plan termination in terms of triggering a distributable event. But based on my first question it could be a moot point.

[DMcGovern]

In these arrangements, it is important to look at who really is the common-law Employer of the employees. If the workers are employees of the PEO and fit the requirements of being leased to the recipient employer, then they either remain employees of the PEO or are terminated from the PEO and hired by a new employer (the former co-sponsor of the PEO plan). If they are employees of the former co-sponsor of the PEO plan, they remain as an employee regardless of what retirement plan they sponsor.

[austin3515]

I've never heard of a PEO where the employees are not the common law employees of the recipient. I assume we are talking about the likes of ADP and PayChex, where the PEO does not for example hire and fire people.

[DMcGovern]

I agree with Austin. For retirement plan purposes, it is very likely that the recipient is the common-law employer of the employees. I may be a bit paranoid, but I think it is still worth reviewing just to make sure no one falls within the guidelines of being a true leased employee.

Once that has been clarified, a review of the MEP provisions for exiting is important. It may require the assets of the exiting co-sponsor to be spun off and terminated. I have also seen documents that allow/require participants to leave their balances in the plan until certain criteria or events have occurred. A trustee-to-trustee transfer could also be done.

But to return to the OP, if the recipient is the common-law employer of the employees, then they would not have severance from employment.

[Lame Duck]

Our VS MEP basic plan document allows the terminating employer to elect a distribution to the terminating participants. It does contain provisions that the terminating employer must certify that it has not established and will not establish an alternative defined contribution plan.

[PensionPro]

On 10/29/2013 at 1:31 PM, Trekker said:

The following language has been in our approved VS specimen plan for years:

"If the Employees of the withdrawing Participating Employer cease participation in the Plan as a result of the withdrawal, the employment of such Employees shall be considered terminated. Distribution of the vested account balance of each such Employee shall be made in the same manner and at the same time as provided in Section ___. The non-vested account balance of each such Employee shall be treated as a forfeiture in accordance with the provisions of Section ____."

Hope this helps.

Which document is that - Corbel, ASC, etc?  Thanks.