How does a PEO set up a multiple employer plan?

Under Rev Proc 2002-21, before the PEO Decision Date, it must adopt a resolution choosing to go with a multiple employer plan, amend its existing single employer PEO plan into a multiple employer plan, and notify its COs of its decision.  The amendment should provide that only Worksite Employees of COs who adopt the plan, and employees of the PEO who are not Worksite Employees (i.e., back office employees of the PEO) may participate.  The amendment should be effective no later than the first day of the plan year beginning in 2004.

How does a CO adopt a PEO multiple employer plan?

Once it receives the PEO's notice that it is setting up a multiple employer plan under Rev Proc 2002-21, the CO must notify the PEO that it intends to adopt the plan, and it must actually sign on to the amendment.  Each must be done by the deadlines set in the PEO's notice.

Is a CO with an existing retirement plan prevented from becoming an adopting employer of a PEO's multiple employer plan?

No.  A company could have many retirement plans satisfying different objectives.  Such plans must be aggregated for a variety of purposes, but that does not prevent a CO from using a PEO's plan to cover some of its workers.

How is employee status affected by a multiple employer plan?

	The adoption of a multiple employer plan does not change or otherwise affect who is an employee's employer under common law principles.  However, there are specific plan rules, such as the exclusive benefit rule, which are applied as though each employer maintaining the plan was the employer of the employee.
	For example, suppose that a given Worksite Employee is actually the common law employee of the PEO and not the CO.  A temp worker, who only works one week at any given job site might well meet this definition.  Such a worker is an employee of the PEO for purposes of coverage testing, whether or not the CO adopts the plan.

How does a multiple employer plan comply with the exclusive benefit rule?

	IRC 413(c)(3) says that in a multiple employer plan, "For purposes of section 401(a), in determining whether the plan of an employer is for the exclusive benefit of his employees and their beneficiaries all plan participants shall be considered to be his employees."
	Notice that it does not say that all such employees are deemed to be employed by a single employer.  Rather, it says that each employer adopting the plan is deemed to be the employer of all employees in the plan for purposes of the exclusive benefit rule.
	Because of this provision, conservative PEO's have long used multiple employer plans to insulate their plans from a challenge on the basis of the exclusive benefit rule.  Either the PEO is the employer or the CO is the employer of a given Worksite Employee.  So long as one of them is the employer, and each of them adopts the plan, the exclusive benefit rule is satisfied.

How is service counted in a multiple employer plan for participation and vesting?

	IRC 413(c)(1) says that in a multiple employer plan, "Section 410(a) shall be applied as if all employees of each of the employers who maintain the plan were employed by a single employer."
	IRC 413(c)(3) says that in a multiple employer plan, "Section 411 shall be applied as if all employers who maintain the plan constituted a single employer, except that the application of any rules with respect to breaks in service shall be made under regulations prescribed by the Secretary of Labor."
	These rules mean that for purposes of counting hours of service and years of service for participation, vesting, and benefit accrual are applied as though all adopting employers were a single employer.  As Rev Proc 2002-21 puts it, "an employee’s service with all of the employers participating in the plan is taken into account for purposes of vesting under § 411 and plan participation under § 410(a)."
	For example, consider John who was an employee of Company X, a PEO client who has adopted the PEO's multiple employer plan, from 2004 to 2007.  During that period accrued four years of service for vesting purposes.  John then leaves Company X and starts to work for Company Y, another adopting employer of the PEO's plan.  John immediately starts his involvement in the Company Y plan with four years of service for vesting purposes.

How is coverage testing run in a multiple employer plan?

Notwithstanding that hours of service with any participating employer are counted together for purposes of 410(a), each employer separately determines whether it complies with 410(b).  Thus, as IRC 1.413-2(a)(3)(ii) says:  "the minimum coverage requirements of section 410(b) are generally applied to a section 413(c) plan on an employer-by-employer basis, taking into account the generally applicable rules such as section 401(a)(5) and section 414 (b) and (c)."

So, suppose that ABC Company is a CO adopting its PEO's multiple employer plan.  For purposes of calculating the ratio percentage test under 410(b), only employees of ABC are counted.  The same is true of each other employer adopting the plan (including the PEO itself).  If any participating employer fails to satisfy 410(b), then the plan as a whole does not satisfy that section and is subject to disqualification.

How is ADP and other nondiscrimination testing run in a multiple employer plan?

Each participating employer must separately satisfy the ADP test, the ACP test,  and the applicable nondiscrimination requirements of 401(a)(4) with regard to its own employees.  See 1.413(c)-2(a)(3)(iii).

How are the top heavy rules applied to a multiple employer plan?

Reg 1.416-1 Q&A G-2 explains the issue very well:  "G-2 Q. Is a multiple employer plan subject to the top-heavy requirements of section 416?  A. A multiple employer plan is subject to the requirements of section 416, but only with respect to each individual employer. Thus, if twelve employers contribute to a multiple employer plan and the accrued benefits for the key employees of one employer exceed 60 percent of the accrued benefits of all employees for such employer, the plan is top-heavy with respect to that employer. A failure by the multiple employer plan to satisfy section 416 with respect to the employees of such employer means that all employers are maintaining a plan that is not a qualified plan."

Thus each adopting employer separately determines whether its portion of the plan is top heavy.  In doing so, key employee status is determined separately for each adopting employer.  If an employer's portion of the plan is top heavy, then that employer must apply the appropriate vesting schedule and provide the required minimum contributions or benefits.  If the employer fails to do so, then the plan as a whole is disqualified for all adopting employers.

How are the 415 limits applied to a multiple employer plan?

Reg. 1.415(e)-1 says that in a multiple employer plan, "For purposes of applying the limitations of section 415 with respect to a participant of an employer maintaining the plan, benefits or contributions attributable to such participant from all of the employers maintaining the plan must be taken into account. Furthermore, in applying the limitations of section 415 with respect to such a participant, the total compensation received by the participant from all of the employers maintaining the plan may be taken into account."  Thus, a participating employee has one 415 limit for all adopting employers.  The 415 compensation limit is based on total compensation from all adopting employers.

How are deduction limits determined for a multiple employer plan?

If the plan was adopted before 1989, there is a single deduction limit shared by all adopting employers unless the employers had elected to determine the limits separately.  If the plan was adopted after 1988, each employer has its own deduction limit based on the compensation of its participating employees.  See IRC 413(c)(6).

How is HCE status determined in a multiple employer plan?

Whether a person is an HCE is determined separately by each adopting employer with respect to its own employees.  This makes sense because nondiscrimination and coverage testing are performed on an employer by employer basis.

What are the filing requirements of a multiple employer plan?

A single 5500 form is filed for the entire plan.  However, a separate Schedule T is filed for each adopting employer, since each performs coverage testing separately.

What happens if there is an operational failure affecting one portion of a multiple employer plan?

	1.413-2(a)(4)(iv) says "The qualification of a section 413(c) plan, at any relevant time, under section 401(a), 403(a) or 405(a), as modified by section 413(c) and this section, is determined with respect to all employers maintaining the section 413(c) plan. Consequently, the failure by one employer maintaining the plan (or by the plan itself) to satisfy an applicable qualification requirement will result in the disqualification of the section 413(c) plan for all employers maintaining the plan."
	So there is nothing which immunizes one participating employer from mistakes committed by another.  Put another way, if any part of a multiple employer plan is disqualified, the whole plan is disqualified.
	Of course, in the modern age of EPCRS, relatively few plans are disqualified.  The focus is on fixing the problems.  It would make sense in a multiple employer plan to require contractually that each employer be responsible for fixing mistakes relating to its portion of the plan.

How does a new CO join an existing multiple employer PEO plan?

	It must adopt to the plan and comply with any appropriate procedures established by the PEO.
	In the process, the CO could, assuming the PEO plan permitted it, terminate the CO's existing plan and transfer the assets and liabilities that CO plan to the PEO plan.
	Alternatively, the CO could choose to retain its existing plan.  In that case, it could freeze future benefit accruals, or allow its plan to supplement the benefits provided under the PEO plan.

How does a CO leave a multiple employer PEO plan?

	It must terminate its sponsorship of the plan, signing the appropriate paperwork.
	After termination, it should probably arrange for a spinoff of the assets and liabilities of its employees to a plan established by the CO (or which it cosponsors with its new PEO).  Such a spinoff will need to comply with IRC 414(l).
	Alternatively, after termination it can arrange for distribution of assets to its employees and their beneficiaries, in accordance with the terms of the plan.

What are the advantages to a CO of adopting a multiple employer plan?

The chief advantages are savings in administrative costs and burdens.  The PEO handles the administration, just as it handles payroll tax returns, and the CO does not need to be bothered with it.  Since the plan files a single 5500, costs of preparing that 5500, as well as costs of preparing plan updates to deal with changes in the law, can be spread over all adopting employers.  This is a major savings.

What are the disadvantages to a CO of adopting a multiple employer plan?

There are several potential disadvantages: The CO must count service performed for other adopting employers. The plan can be disqualified if any employer's portion is handled improperly.  One bad apple spoils the whole barrel. The CO will likely have less flexibility in choosing plan design options than it would if it adopted its own plan. The CO's employees are at risk for the dishonesty or ineptitude of PEO administrators and trustees.  However, a CO should already have considered this issue when hiring the PEO.  After all a dishonest PEO can simply take payroll money and leave the country, or not pay payroll taxes, which are potentially worse fates for the CO.  PEO's must be carefully selected.  As for ineptitude, the CO must balance the potential ineptitude of the PEO with its own experience or lack of experience in investing.  Oftentimes the scales will tip in favor of the PEO.

What happens if the PEO sponsoring a multiple employer plan goes out of business?

In most likelihood, the other employers terminate the plan and spin off the assets relating to their employees to their own plans or to the plan of a new PEO.