Multiple Employer Plan (PEO) and successor plan rules

[pmacduff]

PEO takes on a new payroll client who will be signing on as a participating employer in the PEO 401(k) Plan. The client has an existing 401(k) plan with another vendor & payroll company.

Does the client transfer or terminate the other 401(k) plan? I'm thinking specifically of the successor plan rules. Do those apply in this instance?

Thanks in advance.

[John Feldt ERPA CPC QPA]

I think it has to be a plan-to-plan transfer, the successor plan rules apply, unless there's a change in the employer.

[pmacduff]

I did finally find reference to this situation in Sal's book. He provides some "Arguments for not treating leasing organization's plan as a successor plan."

There was also a private letter ruling (PLR 200241054) where the leasing organization's plan was determined not to be a successor plan.

Food for thought anyway.

[Kevin C]

It isn't really the successor plan rules that would prevent you from terminating the existing plan. The issue is whether or not the employer sponsors and alternative defined contribution plan under 1.401(k)-1(d)(4)(i). Technically, that doesn't prevent you from terminating, it just prevents you from distributing to active participants due to a plan termination. I'd have to look, but didn't the IRS position on PEO plans change in about 2003?

(i)No alternative defined contribution plan.—

A distribution may not be made under paragraph (d)(1)(iii) of this section if the employer establishes or maintains an alternative defined contribution plan. For purposes of the preceding sentence, the definition of the term "employer" contained in §1.401(k)-6 is applied as of the date of plan termination, and a plan is an alternative defined contribution plan only if it is a defined contribution plan that exists at any time during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during the 24-month period beginning 12 months before the date of plan termination, fewer than 2% of the employees who were eligible under the defined contribution plan that includes the cash or deferred arrangement as of the date of plan termination are eligible under the other defined contribution plan, the other plan is not an alternative defined contribution plan. In addition, a defined contribution plan is not treated as an alternative defined contribution plan if it is an employee stock ownership plan as defined in section 4975(e)(7) or 409(a), a simplified employee pension as defined in section 408(k), a SIMPLE IRA plan as defined in section 408(p), a plan or contract that satisfies the requirements of section 403(b), or a plan that is described in section 457(b) or (f).

[Belgarath]

See 2002-21 for some useful information on PEO plans.

http://www.irs.gov/pub/irs-irbs/irb02-19.pdf

[pmacduff]

Kevin C - yes there were many changes by the IRS for PEOs in 2003. In fact, since 2003 this particular multiple employer PEO Plan has been audited by the IRS on 3 different occasions. The PEO got through each audit without any issues, either standard or PEO related.

This is the first time they have come to me with this question, which begs another question for me...what have they done on similar new client plan takeovers as I suspect this wasn't the first!!