Who's the Employer

A Guide to Employee and Aggregation Issues Affecting Qualified Plans

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Rev Prov 2002-21

Analysis of Rev Proc 2002-21

The IRS issued Rev Proc 2002-21 on April 23.  This important and defining ruling on the employee staffing or professional employer organization (PEO) industry industry has broad consequences affecting many issues.  This is a series of web pages devoted to a discussion of the Rev Proc.  There are separate pages for each of the following topics:




Background and history


Relief offer


Penalties for noncompliance


Compliance requirements


Multiple employer plan requirements


Comments and suggestions


ASPA LA Benefits Conference

Summary of Mr. Wickersham's Comments


Questions and Answers

This is still a rapidly developing issue.  Expect the IRS, either formally or informally, to issue additional guidance explaining, refining, and perhaps expanding the Rev Proc.  Additionally, expect the author's views to change and be refined as we all have more time to work with this important Rev Proc.  To that end, I've added a feedback page for you to post your comments and thoughts.

In simple terms (with links to a more complete summary of the various points) the message of Rev. Proc. 2002-21 to PEOs sponsoring single employer plans is threefold:

  1. You may have a serious problem.
  2. If you follow our instructions, we'll make most of the potential problem go away.  As a part of following those instructions, you will either terminate your existing plan or convert it to a multiple employer plan.
  3. If you don't follow our instructions, then whether or not you are the common law employer, you will have additional problems with your qualified plans, because you won't be able to rely on a determination letter after 2003.

The consequence of not being able to rely on a favorable determination letter is so serious that few, if any, rational PEOs will forego the opportunity to take advantage of Rev. Proc. 2002-21. Thus, they will either terminate their existing single employer plans or go with a multiple employer plan, whether or not they believe they are the common law employer of their worksite employees.

In this way, the IRS achieves the result of eliminating most or all single employer PEO plans without having to determine, on a case by case basis, whether a given PEO is the employer of its workers. The nice thing is that PEOs avoid the consequences of their prior exclusive benefit violations, and thus maintain the qualified status of their plans. It is a smart decision for the IRS because it enforces the law without undue strain on their resources. It is a good decision for PEOs because it gives them a roadmap to move to qualified status. It is a good decision for participants in PEO plans because they are freed from the cloud of potentially having their retirement plans disqualified, with potentially disastrous consequences.

All references to the Rev Proc itself are shown with a symbol.  Hence "(4.01)" refers to paragraph 4.01 of Rev Proc 2002-21.

Last Revised 01/31/03

Copyright 2005, S. Derrin Watson.  All rights reserved.