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Who's the Employer?

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

Client Termination In PEO Plan

(Posted July 4, 2002)

Question 209: The CO has decided to change PEO's. Unfortunately, the Participation Agreement in the PEO's multiple employer 401(k)plan states that upon termination of contract with the PEO its deemed plan also terminates. It also states that the CO must take care of notifying "all of its employees of such plan termination if and when it occurs". Can the CO by corporate resolution transfer of the funds in the first PEO's plan to the new PEO's multiple employer plan? Does this violate the successor plan rule?

Answer: I want to make some general comments before getting into the specifics of your question.

First, I want to note what this says about the employer-employee relationship in your standard PEO relationship. I've written at length about that relationship, but perhaps there is nothing more fundamental than this:

The employer-employee relationship is a relationship between the employer and the employee. And the fact that the CO can unilaterally choose to move the workers from the payroll of one PEO to another is one of the clearest indicators available that the PEO is not a party to that relationship, that the CO is the employer. The PEO has a relationship, not with the employee, but with the CO.

Second, the clause that you mention strikes me as prudent and appropriate in a PEO plan. One of the things you buy when you buy the services of a PEO in this situation is that they are handling plan administration on your behalf. If you aren't paying the freight, you shouldn't be participating in the plan.

With that, let's get to the specifics of your plan. I do not have the plan language, but I cannot think of a reason why the CO shouldn't be able to move the money to a new plan which it sponsors or cosponsors.

The CO is a participating employer until the money is out of the plan. In any event, I cannot imagine that the plan requires the company to make distributions which the law prohibits. If the CO is going to cover its employees under a different plan, then they cannot make distributions to the employees consistent with the 401(k) distribution restrictions. The old PEO isn't going to be thrilled about leaving in the money in the old plan. Transfer to the new plan is virtually the only option left given the situation as you have outlined it.

With both of these plans being multiple employer plans, Rev Proc 2002-21 should not be much of a concern. However, if one of them is not a multiple employer plan, that may require additional review.

Leased employees are discussed in chapter 4 of my book, Who's the Employer. Multiple employer plans will be discussed in chapter 18 of the 3rd edition, which will be released soon, and the rules for those plans are summarized on 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.