The CO has decided to change PEO's. Unfortunately, the Participation Agreement that was signed for the 1st PEO's 401K plan states that upon termination of contract with the PEO its deemed plan also terminates. It also states that the CO must take care of notifying "all of its employees of such plan termination if and when it occurs".

Now my question(s) are can or must the CO require and resolve through corporate resolution a trust to trust transfer of the funds in the 1st PEO to the new PEO's plan? Does this violate the successor plan rule? Can we ignore the specific language that deems us terminated and simply spin off to the new plan? Does this violate the employee rights to elect to have the money transferred to an IRA or disbursed in some other form?

It depends on the type of PEO plan. IF PEO 1 and 2 are multiple employer plans, I don't think you have a plan termination from PEO 1 dispite the contract or participation agreement. You have a discontinuance of contributions and a spin off from PEO 1 and a merger into PEO 2. In that case, you may have to 100% vest and mandate a Trust to Trust transfer with no distributions or IRA rollovers allowed because no separation of service has occured from the worksite employer. If you are dealing with PEO single employer plans, leaving PEO 1 would give participants the right to an IRA rollover as the PEO is the employer in that plan format. see revenue PRoc 2002-21