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Answer: Yes they have. And that's why they wrote Rev. Proc. 2002-21.
Your question really goes to the issue at the heart of the Rev. Proc.-- it is one I have discussed several times in this column over the last three years, which I detail at length in Chapter 4 of my book Who's the Employer. Let me revisit the issue here because this is an important framework in understanding the Rev. Proc.
To understand this issue as it affects staffing firms, you must first understand the issue as it affects the age-old question of whether a given worker is an employee or an independent contractor. This is a question that affects qualified plans, payroll taxes, labor law, and responsibility for negligence. It is truly one of the most basic questions in the law. And centuries of cases, regulations, and pronouncements on the subject show that the true issue is one of control. If the hiring party has sufficient control over the actions or finances of the worker, then the worker is an employee. I discuss this in much greater detail in chapter 2 of Who's the Employer.
Moreover, except in a very close case, it probably doesn't matter that the worker has signed an agreement that he will be treated as an independent contractor. Case after case has ignored such agreements when the reality of the relationship indicates that the worker is truly an employee. It is the reality of the relationship that matters-- not the paperwork.
You ask, So what? How does this apply to the PEO situation? After all, we know the worker is the employee. We're just trying to decide who is the employer. The courts and the IRS have answered that the same factors that are used to differentiate between an employee and an independent contractor are used to determine whether the staffing firm or its client is the employer of someone who is admittedly an employee.
This brings us to the fundamental point. The question of whether a worker is the employee of the staffing firm (PEO) or its client organization (CO) will not be decided based on paperwork (particularly paperwork between the PEO and CO to which the worker is not a party!). It will rather be decided based on the reality of the relationship and the control exerted by the parties in that relationship.
So, let's put the paperwork aside. Who tells the worker what to do? The CO. Who decides the worker's pay? The CO. Who decides if the worker is promoted? The CO. Who provides the working with training, office space, staff assistance, etc? The CO. Who dictates the hours the worker is at the office? The CO. Who dictates the order of work? The CO. Who will reimburse the worker's expenses? The CO. Who will make the decision as to whether the worker is fired? The CO. Who can decide to move the worker and his co-workers to a different PEO? The CO.
When you look at the reality of the relationship, in almost every long-term staffing arrangement, the common law employer is in fact the CO. Case after case has so held. Can you guess how many cases have found that a PEO is the true common law employer in a long-term staffing arrangement? None! Is it possible that the PEO could be? Sure. But in the classic staffing arrangement, I have not yet seen it and neither have the courts.
So, let's return to your question. If the CO maintains a plan, are contributions to it deductible under IRC 404, even though they are paid through its agent, the PEO? Sure they are. It is a plan maintained by the employer. In fact, General Counsel Memorandum 200017041 warns that if the PEO is the sole sponsor of the plan, and it is not the common law employer, then the contributions to the plan are not excludible from the employee's income under IRC 402! (Incidentally, this is another issue for which no relief has been granted under Rev. Proc. 2002-21.) W-2s and paychecks do not an employer make. It is that fundamental point which caused the IRS to issue Rev. Proc. 2002-21 to allow staffing firms a chance for relief from the misguided consequences of trying to sponsor a single employer plan. No staffing firm should lightly disregard that relief or ignore the warning implicit in it.
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