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Answers are provided by S. Derrin Watson, JD, APM
Is a Professional Employer Organization a "co-employer" with its customer companies?
(Posted November 24, 1999)
Question 37: The National Association of Professional Employer Organizations (NAPEO) says a Professional Employer Organization (PEO) is a "co-employer" with its customer companies. If a PEO wants to establish a retirement plan and cover these individuals who are "co-employed" by both the PEO and the customer company, does it have to be a multiple-employer plan with the customer company or can it be a single-employer design? In addition, what other issues will need to be addressed with PEOs with regards to retirement plan design?
Answer: The real question is whether NAPEO is correct in its characterization. There are many court decisions which indicate that such "co-employer" treatment is highly suspect. See Q&A 34 of this column for a more detailed discussion.
The real question is not how NAPEO regards the PEO relationship. The real question is how the IRS and the courts regard it. At the moment, one of three arrangements apply:
These issues are discussed in more detail, complete with charts outlining the consequences to each organization, in Chapter 4 of my book, Who's the Employer?.
- The client organization is the true common law employer and the PEO is a mere bookkeeping service. Case after case has found this to be the relationship. In this case, the PEO cannot sponsor a plan covering the workers because it would violate the exclusive benefit rule. However, if it wanted to provide a plan, it could cosponsor the plan with the client organization. All testing should be done at the client level.
- The PEO is the true common law employer. In that case, the PEO can cover the workers under a plan, without needing a cosponsorship arrangement. Regardless of whether the PEO covers them, the workers could be leased employees of the client organization (likely would be if they satisfied the substantially full-time standard) and could be covered under a plan set up by the client organization as well.
- The PEO and its customer are both the employer (as NAPEO so devoutly desires, and as the Microsoft case intimated might be the case in some circumstances). In that case, the worker has two employers for the same task, and either or both may cover the worker under a plan they sponsor.
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The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness
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