PEO Cafeteria Plan

[Guest Doug Johnston]

We have a client who plans to sign a contract with a "professional employer organization" under which they will become "co-employers" of their employees. The PEO has a cafeteria plan that claims to be a "multiple employer cafeteria plan" so that nondiscrimination testing is done separately for each adopting employer. Is there any authority in the law and regs for a multiple employer cafeteria plan? Any insight on IRS/DOL attitudes toward PEO arrangements? Any help is appreciated.

[Ron Snyder]

Remember that welfare plans do not have a requirement which corresponds to the "exclusive benefit rule" under IRC Section 401(a). Therefore, they do not need specific statutory permission to establish a multiple-employer 125 plan.

Historically, many group life plans and group health plans, especially for small groups (1 or 2 to 50 employees) were provided by similar multiple-employer welfare plans. These are less common since ERISA, and are regulated by state insurance departments.

[GBurns]

Even without the idea of a "multiple employer" plan, you should be very cautious about enetering into any plan with any PEO. I suggest that you start your research by visiting the Q&A section of Benefitslink, in particular "Who's the Employer?"; "401(k)" Questions 31 and 41; "Advanced Plan Design" Question 14. Essentially, because the PEO says that they have a plan, that does not make it legal etc etc.

[Ron Snyder]

On the thread entitled "Purchasing Medical Benefits from a PEO" I suggested that they "carefully weigh all of the advantages and disadvantages of employee leasing prior to getting involved with a PEO." You responded, "On the contrary." Now you state, "you should be very cautious about enetering into any plan with any PEO." Is there a material difference between "carefully weigh[ing] all the advantages and disadvantages" and being "very cautious"? If so, what is it?

[GBurns]

I suggest that you reread the first sentence of that post. Then reread the body again. These appear long before you get to your last paragraph.

[Lisa Hand]

Based on the previous postings and other information on BenefitsLink, the main problem seems to be the PEO claim that they can run separate testing and sometimes benefit options for each employer and still basically have one plan. As mentioned above, there are a number of good articles on this subject.

However, we need to be careful to not paint all PEOs with the same brush, careful questions and research can identify those prudently running their organizations and those who are not.