Question 170: A PEO complies with Rev. Proc. 2002-21, and ends up transferring assets for some Client Organizations ("COs") to a Spinoff Retirement Plan. Must a separate spinoff plan be established for each CO? When the spinoff plan terminates, must distributions be offered to the employees, or could the assets be transferred to yet another single employer DC plan maintained by that particular CO? If distributions are offered to the employees, then does the successor plan rule apply, in which case that CO cannot have or establish any other DC plan for 12 months following the final distribution?

Answer: According to Rev. Proc. 2002-21, there is a single spinoff retirement plan, which holds all the assets and liabilities of all "Worksite Employees" whose COs have chosen the termination option, whether through action or inaction. You don't need to set up a separate plan for each CO.

The Rev. Proc. is very specific about what is to happen with the spinoff plan. "The PEO must then terminate the Spinoff Retirement Plan on or before the Compliance Date [the last day of the plan year that begins in 2003] and distribute benefits to the Worksite Employees performing services for the COs as soon as administratively feasible after the termination date."

As I read that sentence, I do not see any room for the spinoff plan to do anything other than distribute the assets to the participants ASAP. Obviously, all the normal distribution options would apply, including direct rollover. Accordingly, the participant could choose to have his or her benefits rolled to a different qualified plan, including a plan maintained by the CO, so long as that plan will accept the rollover.

Your last question squarely hits a thorny issue with this Rev. Proc.-- most of the PEO retirement plans in existence have 401(k) features and hence are subject to the distribution restrictions of 401(k)(2). Presumably, if the participant never was a common law employee of the recipient, we could return their deferrals without worrying about 401(k)(2) (since we never should have taken them in the first place). But suppose they are common law employees of the PEO. They certainly have not severed their employment.

That leaves us with an IRC 401(k)(10) termination distribution, which requires that no other defined contribution plan be maintained by that employer. Of course, if the CO did not cosponsor the PEO's plan and it chooses to sponsor a plan, that should be fine. But if the PEO decides to sponsor a plan (either for its back office employees or a multiple employer plan that would include some of its clients) and it covers 2% or more of the workers who had benefits in the spinoff plan, then 401(k)(10) would not apply to the distribution. Given that some Worksite Employees may have ties to more than one CO, this is a likely scenario, especially if the PEO decides to adopt a Multiple Employer Retirement Plan pursuant to the Rev. Proc.

This whole area would be far more comfortably handled if the IRS were to say that distributions from the Spinoff Retirement Plan were automatically deemed to be on account of severence of employment. Then this issue would not arise. My suggestion on this point is to wait and see what additional guidance the IRS gives.

For additional coverage of Rev. Proc. 2002-21, see my analysis at my Who's the Employer website.

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