PEO and Controlled Group

Husband and wife jointly own Company A.  Company A's employees are being moved to a PEO, and will be participating the PEO plan.  I'm assuming the existing Company A plan is being merged into the PEO plan.

Husband and wife jointly also jointly own Company B.  They will be receiving compensation from Company B.

Does anyone have any experience that they could share with the testing involved if Company B sponsors a plan that would cover just the husband and wife? 

I understand the combined testing that would be involved if Company A had its own plan and B had its own plan, but I'm not sure how it works when Company A is part of a PEO plan.

Does the PEO use the Company B contributions in its testing of Company A?  Seems more likely that the PEO wouldn't even ask about any controlled group members.

Thanks.

I don't really understand your question. Company A & B are a controlled group and need to be tested together for pension purposes.

I guess my question is the logistics of the testing.  Does the PEO plan test Company A's contributions with Company B's?  In our experience, a PEO type administrator wants nothing to do with testing plans outside their plan regardless if there is a controlled group that requires combined testing.

If the combined testing is done by another administrator outside of the PEO, what are the pitfalls to watch out for with respect to the fact that Company B participates in the PEO plan?

I think that there is large risk (putting aside audit lottery issues) that the IRS would say that the individuals who receive paychecks from PEO are actually still employees of A. Of course, depends on facts and circumstances. I think most PEO arrangements assume that and just put the owners in the same PEO plan. PEOs used to be marketed as ways for family-owned businesses to avoid having employees for 410(b) purposes, but I haven't really seen them marketed in that way for quite a while.

Someone has to do the combined testing and you are right PEO Administrator is unlikely to be the one to do it.

Thank you Luke.  The owner did indicate that their initial impression from the PEO was that the employees were solely the employees of the PEO.  We provided some follow up questions for the owner to ask the PEO, who then described the "co-employee" relationship. 

Thank you Lou.  I will see if the owner wants us to review the controlled group issue with their PEO contact. I'm sure this fact pattern must have come up with them before.

19 hours ago, Luke Bailey said:

PEOs used to be marketed as ways for family-owned businesses to avoid having employees for 410(b) purposes, but I haven't really seen them marketed in that way for quite a while.

The IRS put an end to this practice in 2003.  See Rev. Proc. 2002-21.  They gave PEOs until the end of the 2003 year to either terminate their plans or convert them into multiple employer plans.  That doesn't necessarily mean they all did so.  We had a client looking at a PEO about 10 years ago that was still running their PEO plan as a single employer plan.

https://www.irs.gov/pub/irs-drop/rp-02-21.pdf

It is possible that the workers are the "employees" of the PEO and that the PEO plan is a single employer plan. But you would then need to look at the leased employee rules to determine when to count the workers as nonexcludables for the A+B controlled group.  The benefits provided by the PEO plan would be counted as if provided by A+B.  In 414(n), also look for the safe  harbor -- looks like you'd fall short on the 20% rule in this case.

While it might be possible for the workers to be common law employees of the PEO, I've never seen it. Our clients that use a PEO still have sufficient control over the employees that they aren't even close to not being the client's common law employees.  The employees being paid under a leased arrangement has no effect on the common law employee determination (Notice 84-11 Q&A 3).  IF they were to actually be common law employees of the PEO, their service with company A is counted in determining if they are leased employees (Notice 84-11 Q&A 8).

In this case I do not think there is any question that there is a co-employer relationship, and these are not solely the employees of the PEO. 

My question was relating more to the actual mechanics of performing combined testing where one of the controlled group members plan is a PEO plan.  I was just wondering if anyone had any experience as the TPA that is being asked to administer the non-PEO plan and how cooperative the PEO administrator is in providing the information to perform combined testing.

The question may be moot anyway, now that the owner is aware that their non-PEO plan most likely cannot have richer benefits than what is being provided to the employees in the PEO plan.