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Who's the Employer?

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

PEO Plans and Determination Letters

(Posted May 6, 2002)

Question 172: Section 5.09 of Rev. Proc. 2002-21 says that, after the Compliance Date (the last day of the 2003 plan year), a PEO may not rely on an IRS determination letter for a plan that benefits worksite employees, regardless of when it was issued. We work with several PEO plans that operate as multiple employer plans (as they should, we presume, given the recent IRS guidance). If they apply for determination letters for their GUST restatements, will those letters become null and void after 2003? If so, should they wait and apply for determination letters (for GUST) in 2004?

Answer: The answer to this question turns on the technical wording of Rev. Proc. 2002-21. The section in question says:

After the Compliance Date, a PEO may not rely on a determination letter for a PEO Retirement Plan that benefits Worksite Employees performing services for COs, regardless of when the determination letter was issued.

Notice that the term "PEO Retirement Plan" is capitalized. It is specifically defined in Section 6.01:

The term "PEO Retirement Plan" means a defined contribution plan (including a plan that includes a cash or deferred arrangement described in § 401(k)) intended to satisfy the requirements of § 401(a) or § 403(a). The definition of a PEO Retirement Plan does not include a plan maintained as a multiple employer plan that has been adopted by a PEO and one or more COs.

Accordingly, an existing multiple employer plan is not a PEO Retirement Plan and is not subject to the penalty of Section 5.09. That provision only applies to PEOs who choose to disregard the Rev. Proc. and leave their single employer plans in operation after the end of the 2003 plan year.

However, if a PEO were confident that it was, indeed, the common law employer of its workers, and accordingly chose to disregard the Rev. Proc., its single employer plan would be subject to Section 5.09. In that case, it would not be able to rely on any determination letter after 2003, regardless of the date that letter was issued. So it would not matter whether the plan chose to apply for a GUST letter in 2004. It would not be able to rely on that letter, even if it were to be issued.

Click here for more on the consequences of noncompliance.

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.