Hmmm. S. Derrin Watson, IRS. Now there's a scary thought!
I'll start by saying that I commend the IRS in general and the author of Rev. Proc. 2002-21 for a good start. But the volume of questions I've received here certainly indicates that the Rev. Proc. should only be regarded only as a start. Here are my recommendations:
- Define PEO. The Rev. Proc. is a trap for the unwary unless the term PEO is defined. I would define a PEO as an organization which, as its principal business purpose, provides Worksite Employees to COs. Alternatively, one could set a lower threshold and say that an organization is a PEO if it derives more than 30% of its gross receipts from providing Worksite Employees to COs. This would allow the Rev. Proc. to target the entities it's meant to target and exclude hospitals and other organizations that might lease some employees as an incidental accommodation.
- Exclude temps. I would exclude temps from the definition of Worksite Employee, because they are likely to be common law employees of the PEO/staffing firm. Just to be specific, I would say that persons who customarily work less than 4 months/year for any given CO are not Worksite Employees. I would add that a PEO may conclusively presume that such individuals are its employees for retirement plan purposes. Otherwise, there is no way retirement benefits can be provided for such workers under the Rev. Proc.
- Expand relief for multiple employer plans. Section 4.03 of the Rev. Proc. provides, "For the purpose of determining whether a PEO Retirement Plan or Spinoff Retirement Plan satisfies the qualification requirements in § 401(a) upon plan termination (as described in section 5.06), Worksite Employees may be treated as if they were employees of the PEO." This is a very important protection, and should be expanded to cover PEOs that choose a multiple employer plan.
- Provide a mechanism for determining employee status in multiple employer plans. One of the strengths of the Rev. Proc. is that it accomplishes its work without having to deal on a case-by-case basis with employee status issues. However, if a PEO goes with a multiple employer plan, as many already have and many more will, it still must determine employee status to administer that plan correctly. I would provide a safe harbor under which Worksite Employees (excluding temps as described above) would be conclusively presumed for retirement plan purposes, to be the employee of the CO and not the PEO. I would also provide a safe harbor under which Worksite Employees of nonparticipating COs are conclusively presumed not to be the common law employee of the PEO. Without this protection, there will just be additional problems down the road. This presumption would apply only for purposes of the multiple employer plan. It would apply to all section 413(c) plans cosponsored by a PEO and one or more COs.
- Clarify nonreliance. The Rev. Proc. provides a crucial incentive for compliance: "After the Compliance Date, a PEO may not rely on a determination letter for a PEO Retirement Plan that benefits Worksite Employees performing services for COs, regardless of when the determination letter was issued." To complete this provision, I would say that the PEO also may not rely on a favorable notification or opinion letter issued with regard to a prototype or volume submitter plan that it might use. Having said that, I think it would be useful (and perhaps required by law) to provide a mechanism whereby a PEO that believes it is the common law employer of its workers to obtain a ruling not only on plan qualification but also on employment status.
- Clarify affected PEOs. The Rev. Proc. says, "The definition of a PEO Retirement Plan does not include a plan maintained as a multiple employer plan that has been adopted by a PEO and one or more COs." Literally, this means that the Rev. Proc. applies in cases in which no COs cosponsor the plan. But there can be situations in which some, but not all COs cosponsor the plan, and the Worksite Employees of nonparticipating COs are in the plan. I would only exclude multiple employer plans in which all COs of participating Worksite Employees cosponsor the plan. Additionally, I would automatically apply the relief of the Rev. Proc. to PEO plans that, prior to the effective date, terminated their plan or converted it to a multiple employer plan.
- Remove distribution limitations. I would provide that distributions may be made from the terminating PEO Retirement Plan and the Spinoff Retirement Plan as though the plan termination were described in IRC 401(k)(10), without regard to whether other plans exist.
- Provide relief for COs. Allow COs to administer their plans prior to the Compliance Date as though the Worksite Employees were common law employees of the PEO. In effect, this would expand the protection of Section 4.03 to COs.
- Eliminate the "bad apple" rule. This Rev. Proc. will result in a massive increase in the number of multiple employer plans in existence. With that in mind, it is time to revisit Treas. Reg. section 1.413-2(a)(3)(iv), which states, "The failure by one employer maintaining the plan (or by the plan itself) to satisfy an applicable qualification requirement will result in the disqualification of the section 413(c) plan for all employers maintaining the plan." This provision is a tremendous disincentive, particularly when the employers are connected only because they use the same staffing provider. It makes far more sense to sever the plan and allow for disqualification only of the offending portion. In light of the current EPCRS climate, the easiest way to do that is to provide that sanctions for a multiple employer plan are computed separately for noncompliant employers, and without regard to other employers. That way, the Service can make the change without amending regulations or seeking a statutory change from Congress.
Those are my thoughts at the moment. Naturally, I will discuss this further in my June 25 webcast. Click here for more information. Also, you can review detailed coverage of the Rev. Proc. at my web site.
Let me make one additional side note. This is my 200th column for BenefitsLink. I have very much enjoyed my relationship over this time with Dave Baker, whose company (BenefitsLink.com, Inc.) sponsors this very useful and informative site. Like Dave, I've long been involved electronic communication among pension professionals -- with the Pension Information eXchange -- so I know how much work goes into the process. The web site, BenefitsLink, is a very valuable resource for our community. If you agree, drop Dave a note, or better yet sign up for a yellow pages ad, post a help wanted ad, buy a book, support his advertisers, or otherwise make use of the various offerings the site provides.
I've also appreciated the relationship I've developed with many of you as readers of this column. It's become a two-way relationship. You attend my conferences and seminars, you send questions, you buy my book, you give me feedback. All of this helps make my book better and my column better. Thank you so much.