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A Guide to Employee and Aggregation Issues Affecting Qualified Plans

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Rev Proc 2002-21 Compliance

If a PEO wishes to comply with Rev Proc 2002-21, then on or before the PEO Decision Date (May 2, 2003 for a calendar year plan), the PEO must do all of the following:

  1. Decide either to sponsor a Multiple Employer Retirement Plan or to terminate its existing PEO Retirement Plan.  

    1. If it decides to terminate, a resolution to that effect must be adopted by the PEO Decision Date.  For a corporation, this is done by board resolution. In a partnership, it is done by a vote of the partners. For other entities, a "comparable binding action" is required.  The resolution must specify that the plan is to be terminated on or before the Compliance Date.  (5.02(1).) 

    2. If it decides to convert to a Multiple Employer Retirement Plan, then it must adopt the necessary amendments by the PEO Decision Date.  The amendments must be effective no later than the first day of the first plan year beginning after 2003. (5.03(2).)  Click here for more information on operating a multiple employer plan.

  2. Notify all COs with Worksite Employees participating in the existing plan of its choice. The noticed must be postmarked by the PEO Decision Date if it is mailed. The notice must inform COs of their options with regard to the PEO's decisions and must establish deadlines for the COs to comply themselves.  (5.02(2) and 5.03(3).)

Once the CO receives the notice from the PEO, it has the following choices:

  1. Let me out of here! They can have assets for their Worksite Employees spun off to a new terminating plan, the Spinoff Retirement Plan.  This plan must be terminated on or before the Compliance Date.  The assets of this plan will be distributed to employees as soon as possible after termination. (5.02(3)(b) and 5.03(4)(c).) This is the default option. If the CO does not specify another choice, or comply with the requirement of another choice they have selected, then this is what will happen.  (5.02(4) and 5.03(5).) 

  2. Come on over! They can have the PEO Retirement Plan transfer to the CO's defined contribution plan (including a 401(a) plan or 403(a) plan) all of the assets and liabilities relating to their Worksite Employees. (5.02(3)(a) and 5.03(4)(b).)  To select this option, the CO must notify PEO that it is making this choice and provide the PEO with documentation showing that its plan either has a favorable determination, notification, or opinion letter under GUST, or else has applied for a GUST determination letter. (5.04(1).)  The PEO's will specify the dates by which the CO must notify the PEO and provide the documentation. (Those can be two different dates.) Practically speaking, both dates must be soon enough before the end of the 2003 plan year to allow the PEO to transfer the assets to the CO plan by the Compliance Date if they comply, or to transfer the assets to the terminating spinoff plan if the CO does not comply.

  3. Can I come in and play? Finally, if the PEO sets up a Multiple Employer Retirement Plan, the CO can choose to cosponsor that plan. Again, the CO must notify the PEO that it will take this choice, by a date specified in the PEO's notice. The CO must actually adopt the plan by a deadline set by the PEO in its notice, and in any event before the end of the 2003 plan year (the Compliance Date). If the CO does not sign on by the PEO's deadline, then their employee's assets go to the terminating spinoff plan.  (5.03(4)(a).) Click here for a discussion of PEO's requiring COs to cosponsor the plan.

The Spinoff Retirement Plan is a new plan set up by the PEO to handle the funds of the Worksite Employees whose COs have chosen that option, whether through action or inaction. Assets and liabilities of those employees must be transferred to the new plan by the Compliance Date. The spinoff plan must also be terminated by the Compliance Date. (No, the IRS will not raise the "permanence" issue for this plan.) The spinoff plan must distribute the assets to the employees as soon as administratively feasible after termination. The spinoff must comply with IRC 414(l).   There only needs to be one spinoff plan for all COs who have chosen this option.    (5.04(2).)  Click here for further discussion of this plan.

If the PEO sets up a Multiple Employer Retirement Plan, it is required to request a determination letter on that plan. (5.03(6).) For purposes of the remedial amendment period, the requirement that the PEO adopt such a plan is treated as a disqualifying provision. (7.02(2).)  In such a plan, the 2004 determination date for top heavy purposes under IRC 416 is the last day of the plan year as a Multiple Employer Retirement Plan.  (7.01(3).)  After the Compliance date Worksite Employees performing services for COs who do not adopt the plan cannot make contributions to, or otherwise participate in, the Multiple Employer Plan, even if they are, in fact, common law employees of the PEO.  (5.03(4)(a).)

If the PEO chooses the termination option, then by the Compliance Date the original PEO retirement plan will be terminated and essentially all of its assets distributed, either to CO plans or to the spinoff plan. The PEO must seek a determination letter on termination of the PEO Retirement Plan as well as a letter on the termination of the Spinoff Retirement Plan.  (5.02(5) and 5.03(6).)

Any notice sent under the Rev Proc can be sent electronically or by any other method "that reasonably ensures that the intended recipient will receive timely and adequate notice." (5.05.)  This includes both the PEO's notice and the CO's response.

If there are any qualification problems, other than the issues for which the Rev Proc grants relief (essentially the exclusive benefit rule), then those can be resolved normally through EPCRS.  It can be sent electronically or by any other method "that reasonably ensures that the intended recipient will receive timely and adequate notice." (7.01.) 

Click here for a discussion of acting before the end of the 2002 plan year.

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Last Revised 11/02/02


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