Blue Ridge ESOP Associates
(Charlottesville VA / Telecommute)
Retirement Plan Consultant
Cetera Retirement Plan Specialists
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|Question 178: Given that Rev. Proc. 2002-21 seems to treat PEOs as though they weren't the employer of their worksite employees, what affect does it have on cafeteria plans and other welfare or fringe benefit plans maintained by a PEO?|
Answer: The ultimate answer is "It doesn't have any effect at all." However, some additional background will help explain that answer and, in the process, help practitioners better understand what Rev. Proc. 2002-21 does say about qualified plans.
In this way, the IRS achieves the result of eliminating most or all single employer PEO plans without having to determine, on a case by case basis, whether a given PEO is the employer of its workers. The nice thing is that PEOs avoid the consequences of their prior exclusive benefit violations, and thus maintain the qualified status of their plans. It is a smart decision for the IRS because it enforces the law without undue strain on their resources. It is a good decision for PEOs because it gives them a roadmap to move to qualified status. It is a good decision for participants in PEO plans because they are freed from the cloud of potentially having their retirement plans disqualified, with potentially disasterous consequences.
So, with that in mind, let's look at the welfare issue. Remember that Rev. Proc. 2002-21 does not deal with welfare plans at all. It doesn't say that PEOs automatically are not the common law employers of their workers. So anything we derive from it in dealing with welfare plans is purely extrapolation. So what happens to a cafeteria plan, a health insurance program, or some other welfare benefit package that a PEO offers, if the PEO is not the common law employer of its workers?
The issue is complex because there are many types of plans, each with its own set of nondiscrimination requirements. But here are some of the issues that are raised:
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.