Rev Proc 2002-21 and the Single Employer PEO Plan What We ll Cover Definitions Background Relief Offered Consequences of Noncompliance How to Comply Affect on CO Plans Administering a Multiple Employer Plan Open Issues 1
Definitions Can t tell the players without a scorecard The parties Professional Employer Organization (PEO) Not defined: Either it is a company that regularly leases employees (staffing firm); or It is any company that leases employees. Client Organization (CO) Company that uses a PEO to provide workers. Worksite Employee Worker on the payroll of PEO who works at a CO. 2
The Plans PEO Retirement Plan A single employer defined contribution plan sponsored by a PEO. Does not include multiple employer plans or defined benefit plans Spinoff Retirement Plan A plan the PEO sets up to hold assets to be distributed to employees Deadlines PEO Decision Date 120 days after start of 2003 plan year. May 2 for calendar year plans. PEOs must take several actions by this date. Compliance Date Last day of 2003 plan year. December 31, 2003 for calendar year plans. PEO plans should be terminated or converted to multiple employer by this date. 3
Rev. Proc. 2002-21 Background Where s the beef? Few PEOs are the common law employers of Worksite Employees on their payroll In case after case, courts have ruled that worksite employees are common law employees of the CO they serve. PEOs have almost no control over worksite employees, while COs have almost total control Exception: True temp employees are likely common law employees of PEO 4
Exclusive benefit rule problems No qualified plan can cover workers who are not employees or beneficiaries of the plan s sponsor or sponsors. This is the exclusive benefit rule. If worksite employees are not common law employees of the PEO, but the PEO covers them under a single employer plan anyway, that plan violates the exclusive benefit rule. Other problems Coverage test is based on employees. If PEO is covering nonemployees, it is not calculating coverage test correctly. IRC 404 allows for deduction of contributions only for employees. 401(k) contributions for employees are excludable from income under IRC 402(e). There is no provision for exclusion for nonemployees. 5
Congress hasn t helped Bills have been pending in Congress for 6 years to address the PEO situation. They have never gotten out of committee The IRS has waited patiently and not gone after many PEO plans. But waiting time is now over. IRS Creative Solution 6
Relief offered The carrot If a PEO Retirement Plan complies with the Rev Proc The IRS won t disqualify it for past exclusive benefit rule violations arising from covering worksite employees Employees receiving distributions from a Spinoff Retirement Plan are assured that the plan is qualified If the PEO plan terminates, it can be administered before 2004 as though the PEO were the employer of Worksite Employees on its payroll 7
Relief not offered No relief for violations (other than exclusive benefit rule) if PEO converts to multiple employer plan. Use EPRSC. No relief for CO plans No relief for plans adopted after May 13, 2002 No relief for defined benefit plans Consequences of noncompliance The stick 8
If a PEO does not comply The PEO can t claim the relief offered and is at risk for disqualification because of violating the exclusive benefit rule Participants are liable to have distributions treated as not coming from a qualified plan The PEO will need to rerun coverage, discrimination, and other tests based on its true employees. PEOs which choose not to comply 9
If a PEO sponsors a single employer plan covering Worksite Employees after 2003 The plan will not be able to rely on any determination letter issued by the IRS, regardless of when the letter is issued. Hence, no rational PEO will sponsor a single employer plan after the 2003 plan year, regardless of whether it is the employer. What really is a PEO? A. Any organization which leases an employee to another organization B. An organization which calls itself a PEO C. An organization which, as its principal business, leases employees to other businesses D. An organization which, as its principal business, leases employees to other businesses and retains no operational control over those employees E. None of the above 10
How to comply with Rev. Proc. 2002-21 The Decision Before the PEO Decision Date (May 2, 2003 for a calendar year plan), the PEO must decide whether it will: Terminate its PEO Retirement Plan Convert its plan to a multiple employer plan 11
PEO Takes Action By the PEO Decision Date (5/2/03), the PEO must: Adopt a resolution terminating its plan effective as of the Compliance Date (12/31/03); or Adopt an amendment converting its plan to a multiple employer plan effective on the first day of the 2004 plan year Notify its COs of its choice The PEO notice to COs must Tell the COs what the PEO has chosen (termination to conversion to multiple employer) Tell the COs what choices they have and when they have to tell the CO what their choice is Tell the COs what they have to do for each particular choice and give them deadlines to take those actions 12
After the CO receives the PEOs notice it can choose to: 1. Have the benefits for its worksite employees distributed via the spinoff plan. 2. Have the assets for its worksite employees transferred to a plan maintained by the CO. 3. Cosponsor the PEO s multiple employer plan (if the PEO chose to go that route). If a CO wants to have assets transferred to its plan it must: Notify the PEO by the date specified in the PEO s notice that it is taking this option By a date specified in the PEO s notice, deliver to the PEO documentation showing the CO s plan is qualified: A favorable GUST determination, notification or opinion letter; or Show a DL has been requested 13
If a CO wants to cosponsor a multiple employer plan it must: Notify the PEO by the date specified in the PEO s notice that it is taking this option. Sign the PEO plan as a sponsor by the Compliance Date (12/31/03) or an earlier date specified by the PEO in its notice A PEO must transfer a CO s Worksite Employees plan assets to the Spinoff plan if: The CO chooses to have them transferred to the Spinoff plan; The CO doesn t make a choice by the date specified in the PEO s notice; or The CO makes a different choice but doesn t sign the document or provide the documentation by the deadline in the PEO s notice 14
If the PEO chooses to terminate its plan, it must Adopt a resolution terminating the plan by the PEO Decision Date Terminate it by the Compliance Date Apply for a determination letter on the termination Transfer assets to CO plans or the Spinoff plan before the compliance date Distribute any remaining assets as soon as possible after termination If the PEO decides to convert to a multiple employer plan The conversion must be effective by the first day of the 2004 plan year. As of that effective date, the PEO plan can no longer accept contributions from worksite employees of COs who do not cosponsor the plan (regardless of whether they are common law employees of the PEO). It must apply for a determination letter on the multiple employer plan. Top heavy status is determined as of the end of the first multiple employer plan year. 15
Spinoff Retirement Plan There is one Spinoff plan for assets of all employers who choose that option, through action or inaction. The Spinoff plan must be terminated by the Compliance Date (12/31/03). IRS will not argue permanence. The assets must be distributed as soon as possible after termination. The PEO must request a determination letter on termination of the Spinoff Plan. Choices Available: PEO Choices Terminate Plan Convert to Multiple Employer Plan CO Choices Have Worksite Employee benefits distributed via Spinoff Plan Have Worksite Employee assets transferred to its plan Cosponsor the PEO s plan (if the PEO decides to convert to multiple employer) 16
Affect on CO Plans No help here No safe harbor relief Suppose a CO did not cover worksite employees on the grounds they were leased employees under IRC 414(n) and the PEO covered them under a safe harbor plan. But, the workers are actually employees of the CO. The safe harbor rules don t apply, since the workers are common law employees, not leased employees. Rev. Proc. 2002-21 gives no relief. Use EPCRS. 17
No offset relief Suppose a CO covers worksite employees but offsets their contributions by those under the PEO plan. However, the workers are actually common law employees of the CO. There is no basis for the CO to have done the offset, and it must rerun discrimination tests. Rev. Proc. 2002-21 gives no relief. Use EPCRS. Open Issues and Questions 18
Administering a multiple employer plan under IRC 413(c) 19
Adopting employers are treated as a single employer: Exclusive benefit rule Counting hours of service for participation, vesting, and benefit accrual Determining if 415 limits are exceeded Adopting employers test separately for Coverage testing under 410(b) or 401(a)(26) Nondiscrimination testing under 401(a)(4), 401(k), 401(m), etc. Compensation limits under 401(a)(17) Deduction limits under 404 unless the plan was adopted before 1989 Determining HCE status Applying the top heavy rules 20
Bad Apple Rule The plan must pass all tests for all employers or else it is disqualified 5500 Filings Multiple employer plans file a single 5500 Multiple employer plans file a separate Schedule T for each employer 21
More Information www.employerbook.com/0221comment.html www.employerbook.com/peoslides.pdf 22