• Start –Up Guide: Benefits Plans In The Co-Employment World of PEO’s
  • August 21, 2017 | Author: Dale R. Vlasek
  • Law Firm: McDonald Hopkins LLC - Cleveland Office
  • Among the many value-added benefits PEOs offer to their clients are retirement plans and health and welfare plans. If you have worked at other employers in the past, you have no doubt participated in such plans, but working in the PEO context creates a new twist on such programs.

    401(k) Retirement Plans

    The 401(k) plan is a key component of a PEO’s service package. However, the 401(k) plan offered by a PEO is different from other 401(k) plans because the co-employer relationship creates unique issues. For many years, the IRS did not know quite how to deal with such plans. Was the 401(k) one big plan sponsored by the PEO covering all the co-employees from all the co-employers? Or, was it a collection of individual plans sponsored by the individual co-employers and only sharing a document and investments?

    Ultimately, the IRS decided that the proper treatment of PEO-sponsored 401(k) plans is that they are “multiple-employer plans,” or MEPs, which generally means a number of things:

    • There is a shared plan document. The PEO, working with its attorneys or outside provider, creates a document describing the plan. The PEO designs the plan by making certain global choices that apply throughout the 401(k) plan program. The best example is the naming of the plan trustee. The document then permits the individual co-employers some ability to tailor the plan to their own employees. This is usually done by having an “adoption agreement,” which has a menu of choices that the co-employer picks by checking a box or filling in a line. Examples of such choices include whether to have fixed or discretionary matching contributions, or three-year or six-year vesting schedules. There is a tension here between ease of administration versus flexibility to satisfy customization by co-employers. The more standardized the design choices are, the easier the 401(k) plan is to administer. Everybody is the same. More flexibility means more provisions that need to be monitored co-employer by co-employer.

    • The 401(k) plan has an investment platform of mutual funds that are chosen by the trustee with the help of professional investment advisors. These funds are available to all the plans.

    • The 401(k) plan also has one administrator who handles all the co-employers. The administrator also prepares and files the Annual Report (Form 5500) for the plan. Even though it is a multiple-employer plan, pursuant to special IRS guidance, only one Form 5500 is filed regardless of how many co-employers are using the 401(k) plan. The single Form 5500 includes a list of all the co-employers.

    • The 401(k) plan offers co-employers significant advantages, including lower-cost investment options because of the larger pool of assets available by combining plans, and costs of administration are shared by all the plans.

    Individual Testing

    Although the 401(k) plan shares documents, investments, and administration, the IRS’s treatment of the 401(k) plan as a multiple-employer plan means that each co-employer is tested individually for compliance on the various requirements and non-discrimination rules under the tax code. For example, 401(k) plans have a special, non-discrimination test for 401(k) deferrals and matching contributions. Each separate co-employer has to pass the tests looking at the deferrals and/or contributions made by or for the co-employees of that co-employer.

    Joining or Leaving the PEO Relationship

    Because the PEO 401(k) plan is treated as a collection of co-employer plans for purposes of federal law, co-employers have a choice when they join a PEO. They can take their own plan and effectively join it with the PEO 401(k) plan by filling out the adoption agreement and moving the plan assets into the larger asset pool, or they can choose to continue to maintain the plan outside of the PEO’s 401(k) plan. If they remain outside, they are responsible for their own investment platform, administration, testing, and Form 5500 filing.

    If a co-employer decides to terminate its relationship with the PEO sponsoring the 401(k) plan, something needs to happen to the co-employer’s plan (i.e., that is then residing inside the PEO 401(k) plan). Although technically there is no legal prohibition against the PEO allowing the former co-employer in the PEO 401(k) plan, most, if not all PEOs do not want that. Accordingly, most PEO 401(k) plans contain provisions stating that if the co-employer ends the PEO relationship, the co-employer is no longer part of the multiple-employer plan and must take action to adopt its own document and move its assets out of the PEO 401(k) plan.

    One of the issues that arises at that time is whether participants in the former co-employer’s plan can receive a distribution. The 401(k) rules prohibit distributions while still employed before age 59-½. There are, however, exceptions such as hardship and termination of the plan. Here, the co-employers have terminated their co-employment with the PEO but have not terminated employment with the co-employees. While the multiple-employer plan relationship has been terminated, the co-employer’s plan has not terminated, so there does not appear to be an event that would permit distributions.

    Welfare Benefit Plans

    In addition to 401(k) plans, PEOs also typically offer welfare benefit plans. Often, the PEO makes a health plan available for its co-employers. Coupled with that plan, PEOs may administer a cafeteria plan that permits co-employees to pay their portions of the premiums for the health plan on a pre-tax basis. The cafeteria plan may offer options for co-employees to contribute pre-tax for dependent care reimbursement and flexible spending accounts (FSAs).

    Neither the IRS nor the Department of Labor (DOL) has issued specific guidance regarding whether a PEO-sponsored plan in which multiple client employers participate is a multiple-employer plan.

    Some PEOs take the position that their plan is a single-employer plan, and other PEOs use a quasi-multiple-employer style when dealing with the health and welfare plans. The PEO typically either has a cafeteria plan document that it provides to its co-employers to use or a document that has an adoption agreement where co-employers can customize the plan. The cafeteria plan document will permit pre-tax payments for the employee’s portion of the premium. There may also be medical expense reimbursements through an FSA funded by employees’ pre-tax contributions and a dependent care reimbursement account likewise funded by pre-tax contributions.

    Typically, the health benefits are provided through the purchase of insurance by the PEO on behalf of the client employers. There are also PEO-sponsored health plans that are designed to be self-funded with a stop-loss policy.


    There are significant advantages for co-employers to use the benefit plans sponsored by a PEO. These programs are not simple, but with service providers knowledgeable in the PEO world, they can provide a solid benefit package for the co-employer’s employees and cost savings for the co-employer.

    Dale Vlasek, Esq. is an attorney with McDonald Hopkins, LLC, Cleveland, Ohio.

    This article is designed to give general and timely information about the subjects covered. It is not intended as legal advice or assistance with individual problems. Readers should consult competent counsel of their own choosing about how the matters relate to their own affairs.