Who's the Employer?

Answer: You've put your finger on a very important issue. Let me give a simplified example to demonstrate the issue.

Assume Prudent PEO adopts a multiple employer plan in compliance with Rev. Proc. 2002-21. Two of its COs decide to cosponsor the plan. One of them, Happy Highs, has 10 HCEs who are worksite employees on Prudent's payroll, and an equal number of NHCEs. Happy Highs decides to make a 10% nonelective contribution. The other CO, Nice Nons, has 50 NHCEs and no highly compensated employees on Prudent's payroll. It decides not to make an elective contribution at all. Prudent is uncertain whether the workers are common law employees of Prudent or of the respective CO.

If, as is likely, these worksite employees are common law employees of their respective COs, then all discrimination testing is done at each CO's level. So, Happy Highs is providing a uniform 10% profit sharing contribution and Nice Nons is providing a uniform 0% profit sharing contribution, and the plan passes 401(a)(4) with flying colors.

However, if Prudent PEO is the common law employer, then testing must be performed at its level. In that case, we certainly do not have a safe harbor allocation formula, and we must perform general nondiscrimination testing to determine if the plan satisfies IRC 401(a)(4).

Let's take one other possibility. Suppose both the PEO and the CO are the employer simultaneously. (See Chapter 4 of my book, Who's the Employer.) In that case, testing would need to be done at both levels.

You should recognize that this is not a new issue. Conservative staffing firms have been using multiple employer plans for years as a means of avoiding potential exclusive benefit problems. They have faced the exact same uncertainty you are facing. The only thing the Rev. Proc. does is to move more firms in that direction.

Just to make things more fun, if any part of the multiple employer plan does not pass, the whole plan is disqualified. (For more on the rules relating to multiple employer plans, see my detailed discussion.)

In the absence of some "safe harbor" guidelines regarding employee status, the only options a truly prudent PEO has are:

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