Who's the Employer?

Answers are provided by S. Derrin Watson

Management Company Might Be PEO

(Posted September 19, 2002)

Question 232: Several unrelated doctors have formed a management company, which serves them and half a dozen other doctors in the area. The company takes care of payroll, employee taxes, health insurance and similar employee benefits issues for the doctors it serves. The doctors still control hiring and firing, and still supervise their own employees. Obviously the management company is a B-Org for the doctors who own more than 10% of it, but what about the other doctors who have little or no ownership? If I want to set up a 401(k) plan for the management company, does it have to be a multiple employer plan?
Answer: You are certainly right about the potential for a B-Org for any doctor who owns at least 10% of the company and who accounts for at least 10% (maybe 5%) of the company's revenues. But that is not the end of the matter.

This "management company" appears to be functioning as a staffing company, or PEO. If you compare the services they are providing with those performed by your typical employee leasing organization, you will find little difference. The leasing organization has more clients, but the core functions are the same.

That being the case, I am concerned that the management company will be treated as a PEO for purposes of Rev. Proc. 2002-21. This isn't like a hospital, which has a substantial business purpose outside of employee leasing. From the way you describe it, this is the only thing that the company does.

So there is no way I would consider having the management company set up a single employer plan. Because the plan would be established after May 13 it cannot qualify for the relief Rev. Proc. 2002-21 offers, but it is still subject to the potential penalties for noncompliance.

I discuss both PEOs and B-Orgs in my book, Who's the Employer. The third edition of the book is coming out shortly and will include full coverage of Rev. Proc. 2002-21. (The 10% off presale on the third edition expires September 30, 2002.)

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