X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.

MADISON, Wis. – With an increase in the number of credit unions outsourcing human resources tasks to organizations that provide such services, CUNA Mutual Group is advising credit unions to proceed with caution should they choose this arrangement, especially in the area of retirement plans. Professional employer organizations or PEOs provide an integrated and cost effective approach to the management of critical human resources responsibilities and employer risks for its clients, according to the National Association of Professional Employer Organizations. David Fowler, assistant vice president, associate general counsel at CUNA Mutual said “while a PEO arrangement can be an ideal solution to certain credit unions’ HR concerns, it is imperative for any credit union to do its homework before contracting with a PEO.” Fowler said until recently there was little guidance from the Internal Revenue Service regarding the retirement plans that are sponsored by PEOs. The IRS has since took the position that retirement plans sponsored by PEOs must be structured as “multiple employer” plans, meaning any PEO with a retirement plan that is set up as a “single employer” plan will either need to be terminated or converted to a multiple employer plan. Credit unions should refer to IRS publication Revenue Procedure 2002-21. The IRS deadline for making that decision was May 2 for PEOs with plans operating on a calendar year basis. As a consequence, any employers that were participating under a PEO’s single employer plan will be given several options with respect to their respective retirement programs, Fowler said. “One of the options will be to transfer assets to the employer’s own retirement plan,” Fowler said. “It is possible that, by the end of 2003, we will see a number of employers switching from PEO retirement plans to their own retirement plans.” There are a number of issues to consider when an employer with an existing retirement plan enters into a PEO arrangement where the PEO also sponsors a retirement plan, Fowler pointed out. For instance, is the PEO’s retirement plan comparable to the employer’s retirement plan. In many instances, the PEO will sponsor a 401(k) plan that allows only pre-tax employee contributions, Fowler said. There is no matching contribution or profit sharing contribution and the PEO, in most cases, will not offer a defined benefit plan. “Employers may discover this disparity in retirement benefits after the fact and try to figure ways to provide the same level of retirement benefits that were offered to employees prior to entering into the PEO arrangement,” Fowler said. “It is not clear whether the worksite employees are permitted to participate simultaneously in both a PEO-sponsored 401(k) plan and other retirement plans sponsored by the employer.” Credit unions should also ask whether the PEO will permit an employer to opt out of the PEO’s retirement plan and continue maintaining its existing retirement plan. Fowler said many PEOs will permit this, and the issues should be addressed in the service agreement. “If the employer continues to maintain a 401(k) plan, the employer will need to make sure that the PEO be able to timely deposit employee contributions/loan payments into the employer’s plan, in accordance with Labor Department regulations,” Fowler said. Some PEOs will credit back the client’s invoice for the retirement plan amount so that the client is responsible for submitting payment but Fowler cautions “be sure it is clear who will be doing what if the client maintains its own plan.” Another issue that should be addressed is should the employer choose to participate under the PEO’s retirement plan, what will be done with the employer’s existing retirement plan(s)? Fowler said there are several options including merging the plan into the PEO’s plan but only if the PEO plan can/will accept the merged plan; freezing the plan; continuing the plan as an active plan or terminating the plan. If the employer wants to terminate the PEO arrangement, the process will depend on the type of plan. Fowler said in a multiple plan environment, the worksite employer may use the options previously listed. With a single employer plan, the PEO will typically consider the employees terminated and distribute according to the plan terms. Fowler said keep in mind that there may be termination fees such as record-keeping fees, surrender fees and document preparation charges. Credit unions should also ask about 457 plans for executives and whether they need to be discontinued if the executives become employees of the PEO, which is a taxable entity. “The answer to this question is not clear,” Fowler said. “It is likely that the credit union and the executive would no longer be able to make contributions to the 457 plan as long as the PEO arrangement remains in effect.” Finally, what happens if the PEO goes out of business and has covered worksite employees under its retirement plan? Fowler said the PEO plan would need to be terminated and the assets distributed to employees. The exact nature of the termination will depend on whether the PEO had a multiple or single employer plan, he added. -

Credit Union Times

Join Credit Union Times

Don’t miss crucial strategic and tactical information necessary to run your institution and better serve your members. Join Credit Union Times now!

  • Free unlimited access to Credit Union Times' trusted and independent team of experts for extensive industry news, conference coverage, people features, statistical analysis, and regulation and technology updates.
  • Exclusive discounts on ALM and Credit Union Times events.
  • Access to other award-winning ALM websites including TreasuryandRisk.com and Law.com.

Already have an account? Sign In Now
Join Credit Union Times

Copyright © 2019 ALM Media Properties, LLC. All Rights Reserved.