Question 182: I've been approached by a PEO that wants to set up a single employer retirement plan. In light of Rev. Proc. 2002-21, should I do so?
Answer: Absolutely not. Stay as far away from that as you can.

Rev. Proc. 2002-21 is effective for plans in existence May 13, 2002. That means that if a plan was not in existence May 13, 2002, that plan cannot take advantage of its provisions. Thus, it is impossible for such a plan to comply with the Rev. Proc. Even if such a plan were to be terminated or converted to a multiple employer plan before 2004, it would be unable to claim the relief offered by the Rev. Proc.

Even though such a plan would be unable to claim the relief, it would be subject to the consequences of noncompliance-- consequences it will be unable to avoid. It would be subject to disqualification for violating the exclusive benefit rule unless it could prove that it is the common law employer of its Worksite Employees. Moreover, if it were still a single employer plan in 2004, it would be unable to rely on a favorable determination letter, regardless of when that letter was issued.

At this point, the only way a PEO should be considering setting up a retirement plan is to set up a multiple employer plan that is cosponsored by the COs of participating employees. Any other course is fraught with peril.

For further discussion of why these are dangerous waters, see Chapter 4 of my book Who's the Employer. For more on the Rev. Proc., see my expanded coverage, published on the Web.

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.