Who's the Employer

A Guide to Employee and Aggregation Issues Affecting Qualified Plans

Consequences of Noncompliance

According to Rev Proc 2002-21, the following consequences will be faced by a a PEO sponsoring a single employer PEO Retirement Plan which falls in any of these three categories:

The PEO chooses not to comply with Rev Proc 2002-21;
The PEO does not timely comply with all its requirements; or
The PEO adopts a single employer plan after the Effective Date (May 13, 2002) and hence is not eligible to comply.

The PEO will not be able to rely on the relief promised in the Rev Proc. (¶5.08.) Therefore:

The PEO is at risk for disqualification under the exclusive benefit rule.

Participants receiving distributions who choose to roll over those distributions are at risk for the IRS finding that the rollovers were improper. Accordingly, the participants would be taxable and would be subject to a penalty tax on excess IRA contributions.

The PEO would need to rerun any nondiscrimination, ADP and coverage tests based only on its employees

If there is still a single employer PEO Retirement Plan covering Worksite Employees, then effective as of the first plan year beginning after 2003, it will not be able to rely on any determination letter, regardless of the date of those letter (¶5.09.) Click here for further discussion of this point.

As I said in a recent Benefitslink column: Choosing not to comply is not merely risky. It is foolhardy to the point of being suicidal, from a qualified plan standpoint. It's like bungee jumping using only a long piece of string. Don't try it."

Last Revised 11/02/02