Rev. Proc. 2002-21 Q&As
Derrin Watson spoke on Rev. Proc. 2002-21 at ASPA's Los Angeles Benefits Conference, held January 30, 2003. Many who attended his session posed questions relating to the Rev. Proc. and only a few of them could be addressed at the time. Here are the questions relating to PEO issues (sometimes edited) and Mr. Watson's responses.
Can an employer's plan cover a leased employee who has worked for less than 1 year if the plan has no service requirement?
Yes. If the worker is a common law employee of the employer (likely so), then the employer can cover the worker just as he or she would cover any other worker. If the worker is a common law employee of the staffing firm (unlikely), then the employer can cover the worker if the plan defines the worker as a leased employee. A plan can waive the substantially full-time standard in making that determination. See Notice 84-11 Q&A 9.
Are there any successor plan issue with regard to distributions of PEO plan funds and creation of a 401(k) plan by a CO?
No. Mr. Wickersham specifically indicated the IRS would not be raising this issue as plans are converting under the Rev. Proc.
If a PEO provides a health plan, does the election to create a multiple employer plan create an implication that the welfare plans are MEWAs?
I discuss this issue at length in Q&A 178 of my BenefitsLink column.
Should a PEO terminate or convert its single employer plan?
Ultimately, that is a business decision. In light of Mr. Wickersham's comments, I do not believe that a PEO which has run a fairly clean, nonabusive plan, should be concerned about converting to multiple employer status.
What would a spinoff plan look alike? Who are its fiduciaries? How are its assets invested?
I think it would look like a profit sharing plan. You certainly do not want a 0% money purchase plan, subject benefits to joint and survivor annuity requirements. You have no need for 401(k) provisions. The fiduciaries (trustee, plan administrator) are whomever the PEO names in the plan document, just as with any other plan. Assets should be invested in accordance with ERISA guidelines but with a recognition that they will be distributed shortly. Could the assets be invested subject to participant direction? Why not, besides the fact that we are talking about a plan with an existence measured in months, not years.
What about organizations which lease employees on a short-term basis but either has seasonal worksite employees who have been with a CO for more than a year, or has a division which provides employees on a long-term basis?
Mr. Wickersham has not opined on that issue in my discussions with him. My belief is that the true temps should not be treated as worksite employees.
What are the risks to a CO that adopts a PEO's multiple employer plan, if the CO is the common law employer?
The CO will have less flexibility under the PEO plan. The CO is an employer/sponsor under the plan with all the liabilities associated with that status. If the PEO goes belly up, the COs may be left holding a messy multiple employer plan. The bad apple rule may require the COs to fix a mistake of a bankrupt defaulting CO. The fact that the companies are aggregated for 410 and 411 means that the CO may award service credits for work done with an unrelated employer.
Weigh this against the economies of scale that a single PEO plan offers, along with reduce administrative and HR burdens for the PEO.
What would be the basis of treating a true temp as a common law employee of the agency?
In re Critical Care Support Services, Inc. [136 B R 378 (1992, E. D., NY)]. In the case of a true temp who works a week here and a week there, the real relationship is with the agency, not with any given client.
What if a CO changes PEOs and adopts the new PEO's multiple employer plan. Can the CO spin off accounts to the new plan? Are there 411(d)(6) issues? Can the old plan distribute if there is no spinoff?
These may be issues the IRS addresses in future guidance. Based on the law as it stands today, I would say the CO can spin off the accounts, but 411(d)(6) would apply to the transferred balances. As the law stands today, I believe that 401(k) distribution restrictions would pose a problem for distribution.
How do union employees relate to PEO plans?
I discuss this issue at length in Q&A 249 of my BenefitsLink column.
A PEO has a calendar year multiple employer safe harbor 401(k) plan. A CO signs up with the PEO and adopts the plan midyear. Can a safe harbor notice given to worksite employees of the CO even though it is after the first day of the year?
This is another issue on which the IRS may give us guidance in the future. My answer, based on the current state of the law, is that notice can be given midyear because the plan is a new plan as far as the CO and its employees are concerned (and that includes worksite employees which everyone is treating as common law employees of the CO).
PEO has existing single employer plan and in 2003 adopts a new multiple employer plan. The PEO chooses to terminate the single employer plan and sends the appropriate notice to its COs. A CO which cosponsors the multiple employer plan chooses to have balances transferred to the multiple employer plan. Does this comply with the spirit of the Rev. Proc?
In my view, yes, I believe this arrangement would substantially comply with the Rev. Proc. Having said that, I would make sure I submitted the new plan for a determination letter just to be sure the PEO covers all its bases (since this is really more like a conversion than a termination).