Question 179: My firm uses a PEO to handle payroll. We have treated all workers as our common law employees and covered them under our qualified retirement plan. We just got a call from the PEO telling us that starting in 2004 we will be required to cosponsor their plan and cover our employees under it. Is that true?
Answer: It depends on what you mean by "required."

Neither the Internal Revenue Code nor Rev. Proc. 2002-21 requires a CO to cosponsor a PEO's multiple employer plan. In fact, the Rev. Proc. does just the opposite. It says that if the PEO decides to convert to a multiple employer plan, the PEO must send the CO a notice explaining that it can choose to cosponsor that plan or not. If the CO chooses not to cosponsor it, then Worksite Employees of that CO will not be able to participate. Nothing restricts the CO from having its own plan. Click here for more details on the process.

But although the IRS does not require it, the PEO might require it. The PEO could say "You can choose to cosponsor our plan or not. But if you choose not to cosponsor it, then you will no longer be our client, effective in 2004. Take your employees, and out into the cold you go." Or, less drastically, the PEO could say "We are unwilling to remit employee elective deferrals to your plan. If you don't like that, sayonara."

Obviously, I have no idea what the PEO told your firm or why. Perhaps the person who called you misunderstood the situation or miscommunicated to you. I would ask for clarification on what they mean. If it's clear the PEO insists that you cosponsor, remember they're just one in a sea of PEOs, and other PEO firms should be quite willing to work with you.

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