Question 193: A Client Organization (as that term is defined in Rev. Proc. 2002-21) is terminating its 401(k) plan and adopting the PEO's multiple employer 401(k) plan. The PEO has told the CO that current CO employees should be allowed, on plan termination, to receive taxable distributions or elect rollovers into IRAs or into the PEO plan. We disagree. We believe that the PEO plan will be a successor plan. If the CO plan is to "go away" immediately, then a transfer to the PEO plan is the solution. Your comments?
Answer: You are absolutely right.
In light of Rev. Proc. 2002-21 we will be seeing a lot more of this, so let's spend a few minutes here.
When a Client Organization (CO) chooses to join in a PEO's multiple employer plan it becomes a cosponsor of the plan. That is why this design works to deal with the exclusive benefit rule. It doesn't matter whether the PEO is the employer of the participants or the CO is the employer of the participants, because both are sponsoring the plan.
With any 401(k) distribution, we ask whether a distributable event has occured. The employees have certainly not severed their employment on these facts. It is not a 401(k)(10) termination because the company is sponsoring a successor plan covering the same workers. Without a distributable event, a 401(k) plan cannot make distributions.
So, you either look at a forced transfer, which preserves all distribution options, or an elective transfer, which can eliminate a participant's distribution options if the participant consents.
That reminds me to mention just a word or two about my web site. I started it about 2-1/2 months ago in response to an eCommerce class assignment. What started as a class project has developed, particularly in light of the Rev. Proc., into something a lot more major. In addition to the links shown here, it also includes my annotated copy of the affiliated service group regulations, a list of my Q&A columns organized by topic, and other material practitioners are finding useful in the Who's the Employer Reading Room. For those of you wondering what I'd look like in a flame shirt (from my quartet), you can see that, too. With all this, the site has expanded beyond my wildest dreams three months ago, and so it has been christened with an easier to use name: www.employerbook.com. (Yes, the old name, http://employerbook.hypermart.net, still works if you'd rather use that.) Thank you to all my readers who have made that site a success.