Who's the Employer?

Answer: As with all PEO issues, the first question is "Who's the Employer?"

If the PEO is not the common-law employer (and case after case has found that the PEO is not), then the plan violates IRC 125(d). That means every participant (not just the group of highly compensated employees) is taxed as though he or she were in constructive receipt of the monies put into the plan, whether or not the moneys are spent on otherwise nontaxable benefits. (This issue is discussed in more detail in Chapter 4 of my book, Who's the Employer?.)

Let's assume the PEO is the true employer. That means it is the common-law employer of each and every person in the plan. The PEO, then, is left administering the plan as though it were the true employer, not as though the client were the true employer with decisions over benefits.

If the PEO is the employer, then all testing for discrimination, reasonable availability, etc., is done at its level, not at the recipient (client) level.

Of course, assuming it could satisfy the discrimination rules, a PEO could set up separate plans for different groups of workers, with different benefits. Again, each such plan would have to satisfy the nondiscrimination rules, but that is certainly an option, just as a large corporation could set up separate plans for the shipping and sales divisions. Doing so does not violate the "reasonably available" rule, because that rule requires FSA benefits to be reasonably available to all participants, not to all employees.

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