Associate Attorney - Tax (Honolulu HI)
“BenefitsLink continues to be the most valuable resource we have at the firm.”
-- An attorney subscriber
|Question 162: What's the effect of Rev. Proc. 2002-21 on staffing firms?|
Answer: For years I have been saying that plans sponsored by staffing firms, sometimes called Professional Employer Organizations (PEOs), are subject to disqualification for violating the exclusive benefit rule. In fact, from what I have seen, almost no staffing firm qualifies as the common law employer of the workers leased to recipient clients. As such, any "qualified" plan sponsored by such a firm will violate the exclusive benefit rule unless it is a multiple employer plan cosponsored by its participating clients. For a full background of why this is such a serious issue, see Chapter 4 of my book Who's the Employer.
By contrast, if the PEO follows the instructions in the Revenue Procedure, then the PEO's plan will be treated as though there were no exclusive benefit issue relating to the workers it leases to recipent customers. This relief benefits not only the PEO but also all those who receive distributions or transfers from the PEO's plan, including plans of the clients and employees who receive terminating distributions.
To get this relief, the PEO must choose either to go with a multiple employer plan or to terminate its plan. Either way, it must make its choice within 120 days after the start of the 2003 plan year (May 2, 2003 for a calendar year plan). The PEO also must give notice to Client Organizations (COs) who have employees participating in the plan by that date. If the PEO chooses to go with a multiple employer plan instead, it must be adopted by that date.
In the notice to the COs, the PEO must give each CO the following choices:
This is a quick overview of the Revenue Procedure. The main thing it offers is certainty and an end to a controversy that has raged for years, and the IRS is to be commended for taking an approach to resolve the problem which allows PEO plans to comply with the law. However there are open issues, uncertainities, and additional requirements. I discuss these more fully in an article (click here) in the Who's the Employer Reading Room.
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.