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Who's the Employer?

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

Entering or Leaving a Multiple Employer Plan

(Posted May 7, 2002)

Question 176: How should one handle the following situations: (1) a client organization (a "CO" within the meaning of Rev. Proc. 2002-21) with an existing plan begins to use a PEO and wishes to participate in a multiple employer plan (instead of the CO's plan), or (2) a CO discontinues its relationship with the PEO and therefore ceases participation in the multiple employer plan. Is it safe to assume that (as permitted by the plan documents), the funds in these instances are transferred into and out of the PEO's plan via plan-to-plan transfers?

Answer: You've hit the nail on the head. Remember, the CO is a sponsor of the plan. So, let's take the other companies out of the equation. Suppose you had just one employer maintaining a plan for workers who are clearly its employees. Imagine the following situations:

Part of the workforce becomes unionized. Some assets from the existing plan are spun off to a new plan for the nonunion employees. Assets for the union employees stay in the old plan.
The company decides it doesn't need its old money purchase plan any more, so it terminates the plan and transfers all the assets to its profit sharing plan.
The company acquires a subsidiary and transfers the assets from the subsidiary plan into its own plan.

We think of all these transfers as fairly "garden variety." There's no reason why the transfers you describe wouldn't be just as valid, because the CO is a sponsor of the PEO plan. IRC 414(l) contains requirements relating to these transfers, which must be followed.

Of course, there's no particular reason a CO would have to terminate its plan in your first scenario. It could adopt the multiple employer plan promoted by the PEO and freeze its plan. Alternatively, it could choose to adopt the multiple employer plan and still keep its own plan in existence to provide additional benefits beyond those provided in the PEO plan. But terminating the CO's plan altogether and transferring its funds to the multiple employer plans is also a legitimate choice, and could save administrative costs.

Click here for more on the consequences of multiple employer PEO plans.

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.