A PEO health plan raises ERISA questions that your contract should answer.

When an employer joins a PEO health plan, the plan sponsor, plan administrator, Form 5500 filer and COBRA notice sender can end up in different hands. This guide shows what the statutes say and where the answer depends on your documents.

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Who Is the Plan Sponsor and Administrator?

ERISA defines the two roles separately. Under section 3(16)(A), 29 U.S.C. 1002(16)(A), the administrator is the person the plan instrument designates. If none is designated, it is the plan sponsor, and if no sponsor can be identified, a person the Secretary of Labor prescribes by regulation. Under section 3(16)(B), the plan sponsor is the employer for a plan established or maintained by a single employer. For a plan established or maintained by two or more employers, it is the association, committee, joint board of trustees or similar group of representatives of the parties who establish or maintain the plan.

Neither definition names a PEO. The starting point is the paper: the plan document and the PEO service agreement. If the document designates the PEO as administrator, that settles the administrator question under clause (i). If it designates no one, the sponsor is the administrator, and who the sponsor is depends on whether the plan is one employer’s plan or one maintained for several employers. The statute does not decide that for you, and nothing here is a legal conclusion about a particular arrangement. See also our page on the plan administrator and named fiduciaries.

What the Certified PEO Rules Do and Do Not Say

Internal Revenue Code section 7705, 26 U.S.C. 7705, lets a PEO apply to the IRS for certification. Section 3511, 26 U.S.C. 3511, then treats a certified PEO as the employer of its work site employees for the federal employment taxes and obligations it covers, on pay the certified PEO remits. Section 7705 touches employee benefits in one place we found: a certified PEO’s service contract must have it assume responsibility for any employee benefits the contract requires it to provide.

In the text of both sections we found no reference to ERISA, group health plans or MEWAs. Certification is a tax status. By its terms it does not say who the ERISA plan sponsor is, whether the plan is a MEWA or who files a Form 5500. The IRS publishes a list of certified PEOs, so you can check a PEO’s status. Our page on leaving a PEO and the wage base restart covers the tax side.

Does a Worksite Employee Count Toward ACA Large Employer Status?

Under Internal Revenue Code section 4980H(c)(2)(A), 26 U.S.C. 4980H, an applicable large employer is one that employed an average of at least 50 full-time employees on business days during the preceding calendar year. Related companies treated as one employer under section 414(b), (c), (m) or (o) are combined, and a full-time employee averages at least 30 hours of service a week. The regulation, 26 CFR 54.4980H-1(a)(16), defines the employer as the person that is the employer of an employee under the common-law standard.

The regulation text we reviewed does not mention PEOs, and section 3511 sits in the employment tax rules, not in section 4980H. So the open question is whether your company, the PEO or both are the common-law employer of a worksite employee for the count. We have not verified IRS guidance that resolves it, so do not assume your headcount drops out of the count. Run it both ways and have counsel confirm. Our page on the 50-employee test explains the count.

Questions to Ask When Reviewing or Leaving a PEO Plan

Put these in writing to the PEO and keep the answers with your plan records.

1. Who signs the plan document, and does it name the administrator?
2. Is it one employer’s plan or a plan maintained for several employers, and what does the PEO say about MEWA status?
3. Who files the Form 5500, and can we have the copy for our plan year?
4. Does the PEO file a Form M-1, and on what basis?
5. Who sends the summary plan description and the COBRA notices, and who tracks qualifying events?
6. Is the PEO on the IRS list of certified PEOs?
7. If we leave, who keeps the records and who handles claims run-out and people on COBRA?

CFH advises on PEO decisions, helps coordinate with your PEO and payroll provider, and places replacement coverage when a client leaves a PEO. CFH is not a PEO. See PEO transition planning for the steps.