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Answers are provided by S. Derrin Watson, JD, APM
PEO to Client Plan
(Posted February 10, 2003)
Question 250: We have a client organization ("CO") terminating their relationship with a Professional Employer Organization ("PEO"). The company wishes to establish a new plan. But they wish to treat the new plan as a successor plan (resulting in a forced transfer of participant assets). Is this the proper treatment for the plan assets?
Answer: You did not mention whether this is a single or multiple employer plan. If it is a multiple employer plan, and the parties have concluded that the client is the true employer (a good bet) then this is obviously appropriate.
What happens if this is a single employer plan? Nothing specifically authorizes this action, but nothing prevents a spinoff of this nature. In fact, it is one of the end results specifically permitted by Rev. Proc. 2002-21.
Being the conservative fellow that I am, I'd suggest to the CO that it wait until it receives a Rev. Proc. 2002-21 notice from the PEO, indicate that it chooses to have balances transferred to its plan and provide documentation that (i) the new plan has a GUST letter, (ii) is entitled to reliance on a sponsor's letter, or (iii) has applied for a determination letter. That way, the CO has assurance that the IRS has "blessed" the procedure.
But note that Richard Wickersham of the IRS has emphasized that the Service is looking for substantial compliance with the revenue procedure, rather than slavish attention to detail. It strikes me that this type of transfer would certainly satisfy the IRS' requirements for substantial compliance, and I have difficulty imagining the IRS having a problem with it. Obviously, a spinoff would need to be authorized by the PEO's board of directors, or in another manner permitted in the plan document.
For more on Rev. Proc. 2002-21, see chapter 4 of my book, Who's the Employer.
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