Who's the Employer?

Answer: No, I don't think it does, but I surely do wish the IRS had taken the time to define PEO so we had a definitive answer.

Rev. Proc. 2002-21 offers relief from exclusive benefit rule violations to Professional Employer Organization (PEO) plans that follow procedures detailed in that revenue procedure. Implicit in the Rev. Proc. is the notion that most PEOs are not the common law employer of their workers (see Who's the Employer Q&A 175). I discuss this at length in my book. (Q 4:13. References to "Q" are to numbered questions addressed in the third edition of Who's the Employer; subscribers can click to view those questions.) Even if the PEO is the employer, the issue is frequently subject to doubt and disagreement.

Because of this implicit assumption, and the difficulties of making a determination of employee status, the relief is crucial. I believe that the risks of ignoring the Rev. Proc. are so great that I have compared them to bungee jumping using only a string. (Q 4:51.)

Unfortunately, the Rev. Proc. fails to define its most important term, "PEO." So we have to glean that definition from everyday usage and from the purposes of the revenue procedure. (See, e.g., Who's the Employer Q&A 220.)

When I do that, I think one must come to the conclusion that Company A is not a PEO. If A and B were unrelated, it would surely be a PEO, in my view. But with the two businesses in a controlled group, I do not see Company A as subject to the revenue procedure. This issue is crucial here because if Company A is subject to Rev. Proc. 2002-21, and it does not comply with the Rev. Proc., then it will not be able to rely on IRS determination letters after the end of 2003. (Q 4:51.)

Company A is at absolutely no risk whatsoever of being found in violation of the exclusive benefit rule. Because it is in a controlled group with B, all employees of A and B are deemed to have a single employer for most retirement plan purposes, including the exclusive benefit rule. (Q 10:2.) As a result, the core issue in the Rev. Proc. is completely inapplicable. I cannot envision the IRS viewing Company A as a PEO under these circumstances.

In my book, I give two possible alternative definitions of PEO:

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