sponsor leaving their PEO

[WCC]

An employer currently is part of a PEO. Employer has made the decision to exit the PEO for all benefit purposes. The employer currently participates in the PEO 401k plan. As part of the exiting documents, the TPA and PEO state that all employees of client/employer organization will incur a distributable event. The employer will maintain their own 401k plan.

I am having a hard time finding an answer to the following in the EOB

Question: Is it accurate that all participants of the client organization/employer will incur a distributable event when a 401k plan will be sponsored by the employer? As an adopting employer of the PEO plan, wouldn't you have successor plan issues if the assets are distributed?

My thought was to have the assets transferred directly to new plan without the option for participants to elect a distribution.

Thank you

[Lou S.]

I agree with you.

[John Feldt ERPA CPC QPA]

If the PEO's plan document has language that does not allow the 401(k) plan assets of a withdrawing employer to be transferred to a new plan established by the withdrawing employer, then the employer perhaps should ask the PEO to kindly change that provision.

Good luck with that!

Maybe they do a SEP for the rest of the year, and then start up 401(k) twelve months after their employees get paid out from the PEO?

[pmacduff]

I am currently working with a client who has transferred from a PEO (#1) to another PEO (#2) for payroll, benefits....everything. They were in the 401(k) of PEO #1 and want to join the 401(k) of PEO #2.

PEO #1 is telling them that they have to transfer the $$ from their plan to the PEO #2 plan and cannot offer distribution options to the participants. I'm thinking this is a Plan Doc issue as John mentioned.

The receiving PEO (#2) 401(k) Plan allows Employers to terminate participation anytime and treats that portion of the plan as termed. Participants are given distribution options.

Client wonders why PEO #2's Plan would allow that but not PEO #1's Plan. Again, I'm thinking a plan doc issue?

[hr for me]

I have to agree that I don't see where it is a distributable event. We were able to pull out of our PEO without going to another PEO (brought everything back in-house) and we setup a basic 401k plan that the assets were transferred into. Our new recordkeeper/TPA worked with the PEO to do the transfer of assets. We viewed it the same as the employer changing recordkeepers.

I might have a different answer if the employer wasn't planning on continuing the 401k plan.

But definitely it will depend on the plan documents and distribution provisions.