I have a client that started a 401(k) plan effective 1/1/2001. In November, they transferred all of their employees to a PEO. The PEO has informed them that they have the option of keeping their current 401(k) program or changing to the 401(k) program of the PEO.

The PEO has assured the client, the TPA for the current plan and I that, even though the employees no longer work for the client, the 401(k) program which was originally set up can continue to be maintained, with the client signing off on forms provided by the PEO.

Is this reasonable (I thought the employees became leased employees at this stage), and if it is, can someone point me to a reference which allows it?

Thanks in advance.

There is quite a lot of useful info in the Q&A section of Benefitslink, in particular the "Who's the Employer" "Advanded Plan Design" and the "401(k)" columns.

You might also want to look at info at www.cfcw.org

What you will find is that there a many reasons given why the client cannot and should not use the 401(k) provided by most PEOs. There should also be reasons why there should be no form that the client can sign with the PEO that has any relevance to a 401(k) regardless of what the PEO might think or say.

In general, the IRC does not recognize any such thing as a "co-employer".

Given the lack of IRS guidance on how PEOs and "co-employer" arrangements need to be handled for qualified plan purposes, do you think that, as long as the clinet's 401(k) plan specifically covered leased employees, it should suffice for now?

There is no lack of guidance from the IRS. The issue is clear and has been addresssed in many courts.

If you need a very simple example of the fact that a "co-employer" does not exist for purposes of the IRC, just have a PEO fill out a Form 940 and try to take the SUTA discount claiming to be either the "co-employer" or the "employer".

You might also want to ask the reps from supplemental benefits and 125 providers like AFLAC or American Fidelity why they have been converting their plans from the PEOs to the clients.

I realize that there have been court cases that deal with who the "true" employer is, but it's my understanding that, ever since the PEL case, the IRS has been struggling behind the scenes to figure out how qualified plans need to be structured in light of these arrangements (e.g., do they need to be set up a multiple employer plans?). I haven't seen any recent IRS guidance specifically on how qualified plans are affected by PEO arrangements. If I've missed something, please let me know.

It is not the duty of the IRS to address PEO arrangements, it is the duty of PEOs and others to adhere to the IRC. The rules for 401(k) etc are well established and those wishing to esfablish a plan must set it up according to the rules not the other way around.

There have been numerous cases and rulings that address the issue of benefits whether it be 401(k), 125 plans or health benefits. These are easily found by anyone who spends a few minutes looking, even if only to the few that I suggested earlier.

Here is another:
http://www.ebia.com/weekly/articles/Caf000...4Successor.html

There is no need for the IRS to "struggle behind the scenes", the issue is clear cut and easy to follow.

By the way, in most cases if you set up a multiple employer arrangement it most likely will constitute a MEWA which would create even larger problems in most states. Many states do not allow MEWAs.