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Entering or Leaving a Multiple Employer Plan
(Posted May 7, 2002)
Question 176: How should one handle the following situations: (1) a client organization (a "CO" within the meaning of Rev. Proc. 2002-21) with an existing plan begins to use a PEO and wishes to participate in a multiple employer plan (instead of the CO's plan), or (2) a CO discontinues its relationship with the PEO and therefore ceases participation in the multiple employer plan. Is it safe to assume that (as permitted by the plan documents), the funds in these instances are transferred into and out of the PEO's plan via plan-to-plan transfers?
Answer: You've hit the nail on the head. Remember, the CO is a sponsor of the plan. So, let's take the other companies out of the equation. Suppose you had just one employer maintaining a plan for workers who are clearly its employees. Imagine the following situations:
We think of all these transfers as fairly "garden variety." There's no reason why the transfers you describe wouldn't be just as valid, because the CO is a sponsor of the PEO plan. IRC 414(l) contains requirements relating to these transfers, which must be followed.
- Part of the workforce becomes unionized. Some assets from the existing plan are spun off to a new plan for the nonunion employees. Assets for the union employees stay in the old plan.
- The company decides it doesn't need its old money purchase plan any more, so it terminates the plan and transfers all the assets to its profit sharing plan.
- The company acquires a subsidiary and transfers the assets from the subsidiary plan into its own plan.
Of course, there's no particular reason a CO would have to terminate its plan in your first scenario. It could adopt the multiple employer plan promoted by the PEO and freeze its plan. Alternatively, it could choose to adopt the multiple employer plan and still keep its own plan in existence to provide additional benefits beyond those provided in the PEO plan. But terminating the CO's plan altogether and transferring its funds to the multiple employer plans is also a legitimate choice, and could save administrative costs.
Click here for more on the consequences of multiple employer PEO plans.
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