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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Mutiple Employer PEO Issues

(Posted May 1, 2002)

Question 168: What obstacles does a PEO (or any employee leasing or staffing firm) face in trying to convert to a multiple employer plan, as the IRS now suggests? Many clients have other pension plans for their employees. Can the client simply adopt another plan (the PEO plan) as an additional plan? What ongoing responsibilities exist for the client as one employer/member involved in a multiple employer plan? What liabilities are there for the client if the PEO plan is mishandled or the PEO goes out of existence?

Answer: Where do I begin?

Critical to answering this series of questions is understanding what's involved in a multiple employer plan. I have prepared and posted a series of Q&As dealing with this topic as part of my Who's the Employer Reading Room. To summarize briefly the points outlined on that page:

Employees of each participating employer are deemed to be employed by all participating employers for purposes of the exclusive benefit rule.
All participating employers are treated as a single employer for purposes of counting hours and years of service.
Otherwise, all coverage and nondiscrimination testing is performed separately for each adopting employer with regard to its employees.
However, if there is a failure in any employer's portion of the plan, the plan as a whole fails.

In responding to the other questions you pose, there are two key points to remember:

Each client organization is somewhat different. Some, such as Microsoft, are large employers with existing plans of their own and internal human resources departments. Many such employers look to PEOs to provide an alternative benefit structure for some of its workers. Others are little "mom and pop" outfits with just a few employees. They don't have HR departments. They are using the PEO to outsource some HR functions, in the same way they outsource legal and accounting functions. Many small employers don't want to be bothered to set up plans and go with a PEO so they can easily provide benefits to their workers. Each employer will have its own situation and will need to determine separately for itself what makes sense, consistent with its own goals and resources.
Accordingly, Rev Proc 2002-21 allows both the PEO and the CO flexibility in determining what makes sense for them. The PEO can choose to terminate its plan or to offer to its clients a multiple employer retirement plan. If it does the latter, then the CO can choose for itself whether becoming an adopting employer makes sense. If the CO has an existing plan, it may very well choose to cover the affected workers under that plan. (In fact, unless the plan is carefully worded, they already might be covered!) If the CO wants to bring the workers into its plan, the CO likely would tell the PEO that it doesn't want to participate in the multiple employer plan, and that it wants the accrued benefits of the CO's employees transferred to the CO's plan.

Going with a multiple employer approach involves both potential advantages and disadvantages. I outline these in detail on my Q&A page. Each CO must weigh the costs and burdens for itself. However, many small employers might choose to adopt the multiple employer plan approach if it is offered because of the same economies of scale that caused them to use a PEO in the first place.

Important notice:

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.