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BenefitsLink > Q&A Columns >

Who's the Employer?

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

Multiple Employer Plan or Multiple Plans?

(Posted May 18, 2002)

Question 184: In light of the recent IRS guidance on PEO plans, how do we approach the 5500 filing requirement for a multiple employer plan? Should we file one Form 5500 on behalf of a multiple employer plan, or is each participating client employer in the plan required to also file a Form 5500? At one place in the instructions, we are led to believe that each participating employer in the PEO multiple employer plan should be filing a separate 5500 because forfeitures in the plan attributable to one participating employer's participants are, under the terms of the plan, only available to pay expenses of that employer's participants. However, elsewhere the instructions say that multiple employer plans file a single 5500.

Answer: This is a thorny issue and is possibly one of the most commonly misunderstood issues in dealing with the Form 5500 instructions. Let me try to make it as clear as I can.

The relevant direction from the Form 5500 instructions says:

A separate Form 5500, with box A(2) [single employer plan] checked, must be filed by each employer participating in a plan or program of benefits in which the funds attributable to each employer are available to pay benefits only for that employer's employees, even if the plan is maintained by a controlled group.

Many practitioners read that to say that each employer files separately if:

contributions from a given employer are only allocated to employees of that employer; and
forfeitures from employees of a given employer are only allocated to other employees of that employer or to reduce future contributions of that employer.

But technically, that is not what the instruction says. It says "funds attributable to each employer are available to pay benefits only for that employer's employees." The issue isn't how contributions, benefits, or forfeitures are allocated. The issue is availability and handling of trust assets, a different matter.

Suppose you have a situation in which the contributions for a given employer are invested totally separately and the funds are never commingled with the funds of other employers. At any moment, looking at an account, you know exactly which employer's participants own that account. At no time is it possible under the terms of the trust for an investment account of a second employer to ever be used to satisfy the claims of employees of the first. If you have such a situation, then you meet the conditions of the instruction. In essence, you have a separate trust for each participating employer. Interestingly enough, just having participant-directed accounts is not enough to trigger this clause.

So, with that in mind, let's try a couple of different situations and look at the filing requirements:

Prudent PEO sponsors a multiple employer plan with its clients signing on as cosponsors. Prudent determines that the client is the true common law employer of worksite employees at the client's premises. The plan provides that contributions attributable to a given employer benefit only the employees of that employer. However, funds are commingled to a degree. Hence funds from one employer could be used to pay benefits to another employer (even though the accounting records of the credits to the employee accounts show allocations in accordance with the terms of the plan). Accordingly, Prudent files a single 5500 form for the plan, checking box A(3) to show it is a multiple employer plan. It files a separate schedule T for each participating employer, showing each employer's compliance with the 410 coverage tests.
Same facts as the prior example, except that each employer has its own trust document. At all times funds for a given employer are kept separate from the funds of any other employer. At no time can funds of employer A be used to pay benefits to employees of employer B. Now it is treated for 5500 purposes as though each employer maintained its own single employer plan. A separate 5500 form would be filed for each such plan. In this case, mark A(2) ("single employer plan") on each plan's Form 5500.

Click here for further discussion of multiple employer plan issues. A special thanks to my friend Valeri L. Stevens for her assistance with this Q&A. Click here for a discussion of this Q&A.

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.