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PEO and Multiple Employer Plansby: Alan Moore, CFO Slavic Investment GroupRetirement PlansA retirement plan is a written document defining benefits provided by the employer on a nondiscriminating basis for the exclusive benefit of the employees (Treas.1.401-1 (a)(2)). It must specify howemployees become eligible for benefits, how contributions are made to the trust and under whatconditions participants may receive their money. The operation of the plan must conform to a host ofregulations from the Treasury Department, Internal Revenue Service (IRS) and ERISA. The Department ofLabor is also involved in reviewing the Form 5500 information returns and policing the operation of theplan, along with the IRS. A determination letter may be applied for at the IRS certifying that the plan isdrafted in a compliant way, although it is not a requirement to have “D” letter. The IRS opinion that isultimately received will not address how the plans are actually operated. That responsibility falls on theSponsor, Trustees and the third-party administrator.The interactions of the regulations are especially complex when applied to the multiple-employer planbecause each client company must be tested as if it were standing alone. Super-imposed on the normalemployer/employee relationship is the PEO which takes the position of co-employer, although for planpurposes the PEO client company is the common law employer under Revenue Procedures 2001-21 and2003-86.If a PEO client company has several plans, they must be aggregated for testing as required in IRC Section414(b), c, m, n, or o. A control group is defined as common ownership of a group of companies wherebythe same owners own 80% of each company in the group. In this case, all employees working for thegroup of companies must be tested as one plan whether or not several of the companies are PEO clientsand adopt the multiple employer plan.If the client does not have a plan or has never had one, setting up the plan becomes a matter of goingthrough the steps of information gathering, adoption and enrollment. The company survey and lastyear’s census can be used to identify possible control groups, HCEs(those making over 105k and KeyEmployees, 5% owners). The adoption agreement includes several options whereby the eligibility can bemodified or waived entirely as of a specified date. If eligibility is waived, be sure to waive both the

service and age requirement and make sure the client understands that part-time employees employedon the waiver date will be in the plan. NOTE: The waiver could ruin the ability of the HCEs to defer in ameaningful way due to the ADP test. Also, the adoption document allows a limit as to who receives aprofit sharing contribution, if one is declared. By selecting the last-day rule, employees not employed onthe last day of the year don’t receive the contribution. If the last-day rule is not selected, thoseemployees eligible for the plan before their termination must receive the profit sharing. Lastly, do notoverlook the importance of the effective date. Try and use an effective date that corresponds to thedate deferrals will actually begin. This will enable the deferrals to be matched accurately with thecovered compensation and the tests that we perform will be more accurate.The enrollment should include (not counting a waiver) all employees age 21 who have worked for oneyear (at least 1, 000 hours). They may defer up to 85% of their W-2 pay, or 16,000 (in 2008), if they arenot a HCE or Key limited by the ADP test. The 16,000 (IRC 402(g)) maximum amount is limited by theAverage Deferral Percentage (ADP) test. The Average Contribution Percentage (ACP) test is alsoperformed and is the same as the ADP test, but performed on the matching contribution. The PEOactually calculates the match with their system per pay period; Slavic simply tests the match per ACP.The ADP/ACP tests require: 1) the Key and Highly-Compensated employees (HCEs) must be identified; 2)the deferral rates of the Non-Highly-Compensated employees (NHCEs) are averaged together with theeligible non-deferring employees being averaged in as zeros. The HCEs and Keys are only allowed todefer, on average, 2% more than the NHCE average rate. The exception to the rule is if the NHCE rate isless than 2%, then the rate must be multiplied by two (Sec. 401(a)).About 60% of clients choose to match contributions when the advantages are explained. A good matchwill entice the NHCEs to defer more, thereby increasing the allowed rate for the owners and HCEs. Thetax savings on the increased HCE contributions and the fact that the match is subject to a vestingschedule reduces the real out-of-pocket cost of a match. Because the ER funds are not fully vested forsix years, a portion of the match will be forfeited back to the client when employees, who are not fullyvested, terminate. These forfeited funds are then placed into a forfeiture account and used in the firstquarter of the following year as a credit against the match at that time. The procedure is for the trusteeto send a letter with one of the PEO transmittals reading, “take a credit in the amount of xxx for client’sforfeiture account,” thereby reducing the amount of the check that normally adds up to the contributionamount in the electronic file. Slavic does not automatically forfeit the accounts of terminatedparticipants. The trustee or participant may initiate that action.

This brings up several questions to being in a multiple employer plan. First, to be considered terminated,the employee must leave the PEO and the client company and must not work for another clientcompany of the PEO. Otherwise, the employee may not receive a distribution or IRA rollover and noforfeiture of ER money may occur. If the participant begins to work for another client company, his EEand ER balances go with him and he continues to accrue service years and vesting and he is immediatelyeligible for the new employer’s plan. The original employer may not receive any forfeiture until theemployee has terminated from the PEO client company. By this time, the employee may be 100%vested.If the client company leaves the PEO, participants may not receive a distribution or an IRA rolloveroption while they are still employed at the worksite and they would become automatically 100% vested(Sec. 401(k)(2)(b), 408k), unless a successor plan is setup within 90 days. To receive the assets out of theplan, the employer must establish another qualified 401(k) plan with the client as the trustee. That planmay be terminated and distributions made if the client does not set-up or adopt a “successor” pensionplan for one year (Treas. Reg. 1.401(k)-(1)(d)(3)). The client should consult their attorney if any plan is tobe terminated.“Profit sharing” is also included as another way of contributing to the plan and is also subject tovesting. A profit sharing contribution is discretionary and employer funded using a formula such as 6% ofW-2 pay. As with the match, this ER source is not subject to FICA tax as the EE deferral is. It is differentfrom the match in that it must be contributed to all eligible employees whether or not they defer to theplan. A 3% profit sharing contribution to non-Key employees is required if the plan is top-heavy. TheBoard of Directors should declare the profit sharing at year-end and employer has until the filing date ofthe 1120 tax return to fund it. In this instance, the client would send a check directly to the plan trustaccount at Depository Services (DSI) with an accounting. The accounting is necessary because profitsharing is not typically funded through the PEO payroll. As mentioned before, the adoption agreementincludes the option of the “last-day rule” for eligibility to receive profit sharing. This means only theemployees employed as of 12/31 will receive the contribution. Most employers desire this selectiononce it has been explained to them; however this option is not available for Safe Harbor Plans.As you can see, the multiple employer plan allows wide latitude for contributions to be made to thetrust. The trust is the legal entity that holds the funds on behalf of the participants. Only the trusteesmay authorize distributions from the trust. The trustees have hired Slavic Integrated Administration(SIA) to act as the third-party administrator (TPA) in charge of processing and accounting for

contributions, distributions and tax filings. Slavic Mutual Fund Management Corporation (SMF), anaffiliate of SIA, has been appointed as the Advisor to the plan, providing investment advice to theparticipants and monitoring the fund platform. Slavic Investment Corporation (SIC) is the broker/dealermaking the actual transactions at the fund company level. Thus, the plan has a one-source provider forthe full range of services needed to run a successful 401(k) plan.It is the TPA’s job to perform the ADP and ACP tests along with a number of other testes important tothe plan. One of those tests is the top-heavy test. After the first year, a plan is deemed to be top-heavyin the year following the current year’s 12/31 valuation if the Key employees (Treas. Reg. 1.416) own60% or more of the assets in the trust at the client level. A Key employee is an employee who ownsmore than 5% of the business, their spouses and lineal relatives, a shareholder owning 1% of companystock and earning over 150,000 per year and corporate officers who earn over 140,000 per year. Evenif a Key employee sells their stock, they will be considered a Key in the year of the sale and the followingyear. This is especially important when mergers and acquisitions occur. Key employees and HCEs in theacquired company remain so as employees of the acquirer for a period of time. If the merged oracquired company also had a plan, the Key employee’s balances would be added to the acquiringcompany’s plan balances for the top-heavy test (Rev. Proc. 93-42, Sec. 414). In addition, inservice distributions made within five years are added back for the top-heavy determination. Accountingfor this activity is very difficult because clients rarely have the necessary information.If a plan is found to be top-heavy in the first year (Treas. Reg. 1.416) a top-heavy penalty will be requiredbased on the payroll from the plan effective date of the eligible non-Key employees, regardless of whenthey became eligible. After the first year, the plan is considered top-heavy in the year after it fails thetest. The normal 3% profit sharing contribution required for non-Key employees may not need to be thatmuch if, individually, all of the Key employees received contributions equal to less than 3% of theirpay. For example, if no Key employees had any money placed in the plan in the top-heavy year, no profitsharing penalty would be required. If the highest Key employee received 2% from EE and ER resources,then 2% would be the amount of profit sharing required to be made to all non-Keyemployees. Therefore, the client can avoid any top-heavy penalties as long as Key employees do notparticipate.Interim testing will not guarantee that top-heavy plans will be discovered and so it is not done. Newemployees become eligible in the last quarter, year-end bonuses are paid, and deferral rates change allthe time. It is difficult to keep up with these changes considering that the payroll data is transferred a