Who's the Employer?

Answer: This is one of the most awkward parts of Rev. Proc. 2002-21, and I allude to it in Q&A 166.

As part of the relief offered by the Rev. Proc. to PEO Retirement Plans that comply with its provisions, Section 4.03 says:

That doesn't amount to a free pass, however. It simply says, in effect, that if you have been testing the plan hitherto as though the Worksite Employees were employees of the PEO, you don't need to rerun those tests for purposes of determining whether a terminating PEO plan or spinoff plan is qualified.

You are correct; there is no comparable clause for a PEO that chooses to convert its plan to a multiple employer plan. I give a detailed example of why this is a problem in a multiple employer plan in Q&A 165. Continuing that example, if that same employer were to terminate its plan instead of converting to a multiple employer plan, there would be no 410(b) issue. The terminating plan would be able to rely on Section 4.03 to insulate it from liability so long as it complied with the Rev. Proc.

What issues would be covered by Section 4.03? Any issue in which it makes a difference whether the PEO or its client is the employer. So it would deal with 410 participation and coverage, 411 vesting, 415 limits, 416 top heavy rules, 401(k) distribution restrictions, the ADP test (both for purposes of determining whether the plan satisfies 401(a)(4) and for purposes of determining whether the 401(k) feature is valid), the ACP test (again, both for nondiscrimination and for testing the validity of the match), safe harbor 401(k) issues, etc.

The lack of any such comprehensive provision for a continuing plan that converts to multiple employer status is a major disincentive for adopting such plans. This is one of many questions and issues the IRS should resolve as it considers future guidance on this issue.

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