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Answers are provided by S. Derrin Watson, JD, APM
No Back Office Employees in PEO Multiple Employer Plan
(Posted July 10, 2002)
Question 211: Can a PEO offer a Mulitiple Employer plan to the common law employees of its clients but exclude the PEO's own employees from participation? If the PEO's employees are excluded, how can the PEO sponsor a qualified plan that covers only other employers' employees?
Answer: Yes, it certainly can.
Remember, one of the joys of a multiple employer plan is that if any of the sponsors is the employer (or deemed employer) of the workers, the exclusive benefit rule is satisfied. So, if it is a multiple employer plan, there is nothing to prevent the PEO from being a sponsor, even if it chooses not to have its back office employees participate.
In a multiple employer plan under IRC 413(c), coverage testing is done at the individual employer/sponsor level. When you look at the PEO, you ask how many of its HCEs are participating. Assuming that you've determined that all the worksite employees are common law employees of the CO, then no HCEs of the PEO are participating. Having answered that question, the PEO's portion of the plan automatically passes all coverage and nondiscrimination testing for a defined contribution plan.
Why would the PEO be listed as a sponsor? Because it is running the plan. It will decide when and how the plan will be amended. Its name and address is on the front of the Form 5500. No matter how much its clients might change, the "lead" sponsor of the plan will stay the same, which is how how it should be.
For more on PEO plans, see my web site or Chapter 4 of the forthcoming third edition of my book, Who's the Employer. Multiple employer plans will be discussed in Chapter 18 of the third edition; a summary appears on my web site.
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