Who's the Employer?

Answer: Not at all. Indeed, this is one of the real challenges of a multiple employer plan situation. In some respects Rev. Proc. 2002-21 compounds the problem!

For years, conservative staffing firms have used multiple employer plans, such as those authorized in the Rev. Proc., as a means of insulating their plans from challenges based on the "exclusive benefit rule." The theory is, "Either we're the employer or you are; we may not be sure which one of us is, but one of us has to be. With a multiple employer plan, we won't need to worry about the exclusive benefit rule."

That theory is absolutely valid, which is why the IRS is pushing PEOs to move to multiple employer plans. But most testing in such a plan is performed on an employer-by-employer basis. For example, if the multiple employer plan has a 401(k) feature (as most PEO plans seem to have), each employer separately calculates the ADP and ACP tests for its own employees. The same is true of coverage and other nondiscrimination testing.

Thus, using a multiple employer plan does not eliminate the need to know who's the employer. It simply eliminates one of the consequences (an exclusive benefit rule violation) of guessing wrong.

The Rev. Proc. gives no guidance on the employee status issue. It studiously avoids the issue, in fact. It merely mandates that a PEO wishing to maintain a plan covering "Worksite Employees" must convert to a multiple employer format.

It also adds that the plan may not accept contributions from (and presumably may not make contributions for) a "Worksite Employee" whose "Client Organization" (CO)-- the recipient of the worker's services-- does not cosponsor the plan. Therein lies the rub. The term Worksite Employee, as defined in the Rev. Proc., refers simply to a worker who is performing services for a CO pursuant to an arrangement with the PEO. Thus, the term is not limited to employees who are, in fact, common law employees of the CO, but may include common law employees of the PEO.

For example, consider a staffing firm that handles both "permatemps" and true temporary employees. In my view, workers permanently assigned to a single company are not likely to be the common law employees of the staffing firm/PEO, but the temps who spend one week here and another week there almost surely are. However, under the Rev. Proc., the PEO cannot cover the temps under a plan unless the CO that happens to be using them this week cosponsors the plan. But those temps are the common law employees of the PEO and hence will have a negative impact on the PEO's coverage testing.

This is just one of the issues that the IRS must consider as it moves forward with this important initiative. There are many others. Because of the complexity of the issue, and the comments and questions I have received, I have reorganized and expanded my coverage of Rev. Proc. 2002-21 on my Who's the Employer website. Each section explaining the Rev. Proc. now includes citations to it so you can easily find the original material. The following pages are available:

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