Can a PEO (Professional Employee Organization) sponsor a master cafete

[Guest Sheryl Kopsing]

Can a PEO (Professional Employee Organization) sponsor a master cafeteria plan for a number of employers? The PEO employs the workers and then leases them back to the employer. The PEO is responsible for the hiring, firing, payroll, benefits, etc.? Or should each of the employers have their own plan? Also, if it is ok for the PEO to sponsor the plan, what if one of the employers is an Scorp. Can the owners participate in the plan? Any help would greatly be appreciated!

[Guest bswift]

Sheryl, those are tough questions for those dealing with PEOs. There is this interesting phenomenon going on out there in which PEO are sponsoring multiple employer 401(k) plans, yet maintaining single employer cafeteria and other welfare plans. Most PEOs are simply hedging their bets on the 401(k) issue, althought most arrangements might require a multiple employer plan rather than a single plan. Most of the larger PEOs are taking the position that they are indeed the employer for payroll tax and certain benefits. Technically, for 125 purposes, the sponsor of a cafeteria plan can only cover its "employees." The typical def of employee is the control test, but PEOs seem to be stretching that one. The issue of certain owners of S Corps is difficult too. The question is "why should the owner be able to participate in the PEOs 125 plan when he or she couldn't participate in his or her own plan?" On the other hand, if the owner is an employee of the PEO rather than the S Corp, why not? I know that I probably havn't been much help, but there is just not much out there. Good luck.

[Guest Sheryl Kopsing]

bswift, thanks for your reply. I spoke with

a legal consultant at a firm we contact for

legal issues on flex. She informed me also, that there is not a lot of info on this subject. She did say that the PEO could probably sponsor any short term employees (short term being less than 1 year) and after that time the employer would need to have their own plan for their long term (1 year plus) leased employees to participate in. On the SCorp subject, she also said she didn't think that they should be able to participate. Sounds to me like we will advise against this practice for our clients.

[SLuskin]

We have been reading about this issue, and it seems that for some plans, the PEO and the employer are co-employers. Meaning that either one could sponsor the plan. I do not like the idea of the PEO sponsoring the plan. HOw would they do the discrimination testing? When is open enrollment? Can you offer POP for some employees and flex benefits for others?

[Linda]

If a recipient sponsors a plan for or including leased employees, can you reflect participation in the recipient's plan on the W-2s issued by the lessor/PEO?

[Guest Sheryl Kopsing]

Linda, this whole PEO thing is so confusing. I think the IRS needs to take a serious look at it and give us some guidance in this area. Leased employees are technically employees of the recipient, that is why I'm wondering if the PEO can sponsor a plan for multiple recipients. Harry Becker said that the entity which has direct control over the leased employees is the employer. So, in my opinion, if the plan document doesn't disclude leased employees and the recipient allows them to participate in their plan, yes it should reflect on the W2's.

[Linda]

But, if recipient sponsors the plans and the leasing organization/PEO issues the W-2s, does it hang together on the entities' tax returns? What is the leasing company's status in, e.g., withholding 401(k) and 125 and forwarding to the recipient? My initial thought was to make the leasing organization a participating employer in the recipient's plans (even if that creates multiple employer plans). Do you think that's overkill?

[SLuskin]

I just read a long and complicated discussion of this issue in my quarterly update from EBIA. It seems like we need direct IRS guidance, but that both kinds of plans have some problems.