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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Additional Guidance on Rev. Proc. 2002-21

(Posted April 29, 2002)

Question 166: Have you heard back from the IRS regarding Rev. Proc. 2002-21? Can we expect any additional guidance?

Answer: Yes. I've been out of town a lot lately, but Jeanne Royal Singley, the author of Rev Proc 2002-21, tracked me down Monday afternoon, and I appreciate her doing so. Naturally, any comments she made are unofficial and not binding on the IRS.

She said that I wasn't the only person with questions about the Rev. Proc. She also said discussions have occurred at the IRS to see if they could provide some answers to questions left open by the Rev. Proc. I obviously don't know what answers will be given, or how they will be given, but I appreciate their openness to responding to taxpayer questions and concerns.

She confirmed there is no definition of PEO currently in the Rev. Proc., other than an indirect operational definition. Section 6.05 defines a Client Organization (CO) as "an organization that enters into a service agreement with a PEO under which Worksite Employees provide services to the organization." Hence, a PEO would be an entity that has entered into such an agreement with a CO. That seems to me to be a very broad definition of PEO, which would include many organizations that are not primarily in the business of providing employees to other businesses.

She also pointed out Section 4.03, which provides, "For the purpose of determining whether a PEO Retirement Plan or Spinoff Retirement Plan satisfies the qualification requirements in 401(a) upon plan termination ... Worksite Employees may be treated as if they were employees of the PEO." The purpose of that provision, she said, is to allow a terminating PEO plan that complies with the Rev. Proc. to receive a favorable letter upon termination even though the plan has been (possibly incorrectly) administered as though the Worksite Employees were common law employees of the PEO. This extends beyond the exclusive benefit rule. But as I read the Rev. Proc., I do not find comparable relief for a plan that converts to a Multiple Employer Plan (a serious potential issue).

So, stayed tuned folks! There's probably more to come.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.