Who's the Employer?

For purposes of determining whether a retirement plan maintained by a PEO for the benefit of Worksite Employees of COs satisfies the requirements of § 401(a)(2) prior to the Compliance Date, a PEO may treat Worksite Employees as its employees.

Fred owns 100% of Astaire Permatemps, a PEO. Fred has long believed that his company is the "co-employer" of the 1,000 workers (Worksite Employees) on its payroll which Fred "leases" to other companies. In addition, there are 50 "back office" employees at Astaire who run the shop, cut the paychecks, interface with the clients, etc. The only highly compensated employee is Fred.

For several years, Fred has maintained a single employer safe harbor 401(k) plan (providing a 3% nonelective contribution). The plan covers Fred and the Worksite Employees. Other back office employees are not eligible. The most recent 5500 Schedule T shows 1 out of 1 HCE benefiting under the plan, and 1,000 out of 1,049 NHCEs benefiting, and easily passes the ratio percentage test.

Fred is concerned about Rev. Proc. 2002-21 and seeks legal advice on what it means for him. Fred's lawyer advises him to comply with its procedures and establish a multiple employer plan, reasoning that if Astaire Permatemps is not the employer of its Worksite Employees, then by following the procedures Astaire Permatemps can go forward in a safe manner without the problems of disqualification for failure to satisfy the exclusive benefit rule. Moreover, if Astaire Permatemps does not comply, perhaps under the belief that it really is the common law employer of the workers, then Astaire will not be able to rely on any determination letters for its single employer plan after 2004.

But Fred's counsel isn't solely concerned about the future. He asks the question: what if Astaire Permatemps has never been the common law employer of its stable of Worksite Employees? Because it will comply with the Rev. Proc., it will not need to worry about the exclusive benefit rule, but what about other rules?

Consider, for example, the coverage requirements of IRC 410(b). If the Worksite Employees are not common law employees of Astaire Permatemps, then they cannot be counted in determining whether the plan covers enough NHCEs. In fact, in that case, the plan will have covered 0 out of 49 NHCEs and 1 out of 1 HCE. This is as clear a coverage failure as you could ask for. And Rev. Proc. 2002-21 provides absolutely no relief for that failure.

Fred's lawyer carefully reviews the situation and determines that the Worksite Employees are not Astaire Permatemps employees under general common law principles. Accordingly, in addition to telling Fred to comply with Rev. Proc. 2002-21, the attorney urges Fred to use EPCRS to correct the prior coverage failure.