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Question 195: If a PEO elects to convert to a Multiple Employer Plan because its employees are determined to be common law employees of the Client Organization (CO), how can the PEO get a tax deduction for employer contributions made by the PEO to the common law employees of the CO? |
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Answer: Excellent question. I'm going to get hypertechnical in my response. Follow me down the path, though, and I think and hope it will make sense by the end.
Technically speaking, who's contributing money under the plan for the worksite employees? The CO. But the PEO is the entity writing the check to the pension trust. Why is the PEO doing this for people who aren't the PEO's workers? Because the PEO is getting paid for doing it. The PEO is acting as the CO's agent in doing it. The PEO has contracted to act as the CO's agent and is being paid for doing so. So the expenses are deductible under Code section 162 as ordinary business expenses. In a very real sense, it is the CO that has the pension deduction, not the PEO. Because we've established that the PEO is entitled to the deduction as an ordinary and necessary business expense of acting as the agent of the CO, it does not particularly matter which line of the tax return that expense shows on. I suppose a PEO could list on the "employee benefit plan" line of the return only the expenses for its own back office employees. It then would attach a separate schedule showing the retirement plan contributions it made as agent for its clients. But the tax result will be exactly the same if the PEO combines both portions of its contributions and puts them on the "employee benefit plan" expense line. Certainly nothing in Rev. Proc. 2002-21 requires the separate allocation. Either way, it is deductible. On June 25 I will be giving a webcast regarding Rev. Proc. 2002-21. Click here for more information. Also, you can review detailed coverage of the Rev. Proc. at my web site. |
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