Remember those old Roach Motel commercials?
“Roaches check in…but they don’t check out.”
For some employers, that’s exactly what it feels like with a PEO.
Don’t get me wrong. I understand why businesses use Professional Employer Organizations (PEOs). They can simplify payroll, HR, benefits administration, workers’ compensation, and other employment-related functions. For a growing business without a dedicated HR department, a PEO can make a lot of sense.
The problem isn’t getting into a PEO.
It’s getting out.
When an employer decides to switch from one PEO to another—or leave the PEO model altogether—that’s when the retirement plan issues begin.
Who sponsored the 401(k) plan?
Who adopted it?
Do participants need to be spun off into a new plan?
Is there a plan termination?
Is there a merger?
What happens to outstanding participant loans?
Who files the final Form 5500?
What happens if the employer has changed EINs during the process?
I’ve seen situations where everyone assumed someone else was handling these issues. Months later, the employer learns that Form 5500s weren’t filed, participant accounts weren’t transferred properly, or the IRS still thinks they’re sponsoring a plan they thought ended years ago.
None of these problems are impossible to fix. But they’re much easier—and much less expensive—to address before leaving the PEO than after.
Too often, employers focus on negotiating the new payroll arrangement while treating the retirement plan as an afterthought. That’s backwards. The retirement plan has its own legal and
operational requirements under ERISA and the Internal Revenue Code that don’t disappear just because you’re changing HR providers.
The lesson is simple.
Before you check out of a PEO, make sure you know exactly how your retirement plan is checking out too.
Otherwise, like those old Roach Motel commercials, you may discover that leaving isn’t nearly as easy as getting in.