Small businesses struggling to maintain compliance with the constant flow of regulations impacting human resources and benefits compliance have increasingly turned to professional employer organizations (“PEOs”) to serve as payroll agent or, in some circumstances, co-employer of their employees. On May 4, 2016, the IRS released temporary and proposed regulations that implement a new voluntary certification program for PEOs.
The application process for becoming certified will open on July 1st. A revenue procedure further detailing the application process will be released in next several weeks, after which time the IRS will publish lists of certified PEOs (CPEOs). The IRS welcomes public comment on these regulations – the deadline for submissions is August 4th.
Requirements to become a CPEO appear quite demanding. A PEO applicant along with the PEO’s “responsible individuals” (including certain owners, directors, officers, and individuals with ultimate responsibility for managing the PEO) must submit an application to the IRS and satisfy certification requirements.
In addition to satisfying the certification requirements, PEOs must meet these requirements on an ongoing basis after becoming certified. If they do not, a CPEO may have their certified status revoked or suspended, in which case the IRS will make this information available to the public and the CPEO will have to notify their clients.
To submit an application, a PEO applicant must permit the IRS to investigate its statements and submissions. Each of the PEO’s responsible individuals must also pass background and tax compliance checks as well as submit fingerprints. The regulations generally require that PEOs:
- Have one or more physical business locations in the US and a majority of responsible individuals residing in the US;
- Provide the IRS with audited financial statements on a regular basis;
- Post a bond issued by a surety company that meets certain requirements for the payment of federal employment taxes;
- Provide the IRS with quarterly assertions and examination level attestation regarding compliance with federal employment tax withholding and depositing requirements; and
- Present an independent CPA’s opinion that their financial statements reflect positive working capital.
Of course, there is no discussion in the regulations concerning the benefits of becoming a CPEO. It may simply be that the CPEO designation will assist the IRS in regulating this burgeoning industry. In any case, becoming certified is likely the new benchmark for PEOs to attract clients moving forward.
The new Department of Labor rule defining the scope of who is an ERISA fiduciary (see our prior post here) has caused much consternation among investment professionals. Much of the new rule is focused on reworking the outer fringes of the ERISA landscape capturing those in the investment industry offering IRA and annuity products.
Given that investment professionals appear to be the primary target of the new fiduciary rule, employers may believe that this is one room in the ERISA house of horrors that they do not have to enter. To a large extent that is true because the concept of fiduciary status and the fee disclosure rules, as applied to traditional retirement plans, are already well entrenched. Still, employers need to consider whether certain providers to their retirement plans are newly covered by the revised fiduciary rule and determine whether those relationships are being conducted in accordance with the new rules.
In reviewing existing arrangements, employers having group health plans supplemented by health savings accounts should be aware that health savings accounts are specifically covered by the new fiduciary rule. As ERISA welfare plans, health savings accounts were outside the reach of the earlier fee disclosure rules. The rationale for covering health savings accounts under the new fiduciary rule is presumably the belief that a number of employees maintaining these accounts are using them as a way of establishing another source of retirement savings.
Before the new fiduciary rule takes effect, employers should examine their role with any health savings account arrangements to assess how the health savings accounts are being made available to employees, how the providers offering those services are being compensated, whether the compensatory arrangement needs to comport with the new fiduciary rule, and if so, how the provider intends to satisfy the requirements of the rule.