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BenefitsLink > Q&A Columns >

Who's the Employer?

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

Hospital as PEO

(Posted June 12, 2002)

Question 198: What impact will Rev. Proc. 2002-21 have on entities that are not necessarily labeled a PEO? My example is a hospital that leases employees to various employers within the community, and continues to cover the employees under the hospital's retirement plans (a m0oney purchase pension and a 401(k) plan). Can Rev. Proc. 2002-21 be applied in this situation?

Answer: In a word, yes. But that conclusion is anything but certain.

Technically, Rev. Proc. 2002-21 only applies to PEOs, a term the Rev. Proc. does not define. Of all the problems and issues posed by the Rev. Proc., this lack of a definition for its most basic term is the most glaring.

Section 1.01 of the Rev. Proc. says:

This revenue procedure describes steps that may be taken to ensure the qualified status of defined contribution retirement plans maintained by professional employer organizations (PEOs) for the benefit of Worksite Employees. PEOs are also commonly known as employee leasing organizations.
So, without a definition, one would think that a PEO is something that most of us would think of as being a leasing organization. Obviously, a hospital would not fit in that image.

But I spoke to the author of the Rev. Proc. (Jeanne Royal Singley) several weeks ago. She believes Section 6.05 of the Rev. Proc. defines PEO, albeit indirectly and operationally. That section says:

The term "Client Organization" (CO) means an organization that enters into a service agreement with a PEO under which Worksite Employees provide services to the organization.
Using that line of reasoning, any organization that enters into a service agreement to provide Worksite Employees to a CO is a PEO. And the hospital most certainly would be included in that broader definition.

When she said this, I believe I immediately started to ask about a hospital as a PEO. She said that the Service is aware of the issue. Earlier in our conversation, she indicated that the IRS is considering issuing additional guidance clarifying some issues in the Rev. Proc., and we can only hope this issue is one of the points they will address.

Of course, Ms. Singley graciously responding to my questions does not constitute an official position of the IRS and it is binding on nobody. But the conversation shows that the Rev. Proc. might well have a broader sweep than many people realized at first.

Notwithstanding the foregoing, I have lately concluded that the IRS will likely not enforce the Rev. Proc. against hospitals and similar entities. Click here for my analysis

Also, you can review detailed coverage of the Rev. Proc. at my web site.


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.


Copyright 1999-2017 S. Derrin Watson
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