I
108TH CONGRESS
1ST SESSION
H. R. 2178
To amend the Internal Revenue Code of 1986 to clarify the status of profes-
sional employer organizations and to promote and protect the interests
of professional employer organizations, their customers, and workers.
IN THE HOUSE OF REPRESENTATIVES
MAY 21, 2003
Mr. PORTMAN (for himself and Mr. CARDIN) introduced the following bill;
which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to clarify
the status of professional employer organizations and
to promote and protect the interests of professional em-
ployer organizations, their customers, and workers.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Professional Employer
Organization Workers Benefits Act of 2003’’.
SEC. 2. NO INFERENCE.
Nothing contained in this Act or the amendments
made by this Act shall be construed to create any infer-
ence with respect to the determination of who is an em-
ployee or employer—
(1) for Federal tax purposes (other than the
purposes set forth in the amendments made by sec-
tion 3), or
(2) for purposes of any other provision of law.
SEC. 3. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZA-
TIONS.
(a) EMPLOYMENT TAXES.—Chapter 25 of the Inter-
nal Revenue Code of 1986 (relating to general provisions
relating to employment taxes) is amended by adding at
the end the following new section:
‘‘SEC. 3511. CERTIFIED PROFESSIONAL EMPLOYER ORGANI-
ZATIONS.
‘‘(a) GENERAL RULES.—For purposes of the taxes
imposed by this subtitle—
‘‘(1) a certified professional employer organiza-
tion shall be treated as the employer (and no other
person shall be treated as the employer) of any work
site employee performing services for any customer
of such organization, but only with respect to remu-
neration remitted by such organization to such work
site employee, and
‘‘(2) the exemptions and exclusions which would
(but for paragraph (1)) apply shall apply with re-
spect to such taxes imposed on such remuneration.
‘‘(b) SUCCESSOR EMPLOYER STATUS.—For purposes
of sections 3121(a) and 3306(b)(1)—
‘‘(1) a certified professional employer organiza-
tion entering into a service contract with a customer
with respect to a work site employee shall be treated
as a successor employer and the customer shall be
treated as a predecessor employer, and
‘‘(2) a customer whose service contract with a
certified professional employer organization is termi-
nated with respect to a work site employee shall be
treated as a successor employer and the certified
professional employer organization shall be treated
as a predecessor employer.
‘‘(c) LIABILITY WITH RESPECT
TO INDIVIDUALS
PURPORTED TO BE WORK SITE EMPLOYEES.—
‘‘(1) GENERAL RULES.—Solely for purposes of
its liability for the taxes imposed by this subtitle—
‘‘(A) the certified professional employer or-
ganization shall be treated as the employer of
any individual (other than a work site employee
or a person described in subsection (e)) who is
performing services covered by a contract meet-
ing the requirements of section 7705(e)(2)(F),
but only with respect to remuneration remitted
by such organization to such individual, and
‘‘(B) the exemptions and exclusions which
would (but for subparagraph (A)) apply shall
apply with respect to such taxes imposed on
such remuneration.
‘‘(d) SPECIAL RULE FOR RELATED PARTY.—Sub-
section (a) shall not apply in the case of a customer which
bears a relationship to a certified professional employer
organization described in section 267(b) or 707(b). For
purposes of the preceding sentence, such sections shall be
applied by substituting ‘10 percent’ for ‘50 percent’.
‘‘(e) SPECIAL RULE FOR CERTAIN INDIVIDUALS.—
For purposes of the taxes imposed under this subtitle, an
individual with net earnings from self-employment derived
from the customer’s trade or business (including a partner
in a partnership that is a customer), is not a work site
employee with respect to remuneration paid by a certified
professional employer organization.
‘‘(f) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section.’’.
(b) EMPLOYEE BENEFITS.—Section 414 of such
Code (relating to definitions and special rules) is amended
by adding at the end the following new subsection:
‘‘(w) CERTIFIED PROFESSIONAL EMPLOYER ORGANI-
ZATIONS.—
‘‘(1) PLANS MAINTAINED BY CERTIFIED PRO-
FESSIONAL EMPLOYER ORGANIZATIONS.—
‘‘(A) IN GENERAL.—Except as otherwise
provided in this subsection, in the case of a
plan or program established or maintained by a
certified professional employer organization to
provide employee benefits to work site employ-
ees, then, for purposes of applying the provi-
sions of this title applicable to such benefits—
‘‘(i) such plan shall be treated as a
single employer plan established and main-
tained by the organization,
‘‘(ii) the organization shall be treated
as the employer of the work site employees
eligible to participate in the plan, and
‘‘(iii) the portion of such plan covering
work site employees shall not be taken into
account in applying such provisions to the
remaining portion of such plan or to any
other plan established or maintained by
the certified professional employer organi-
zation providing employee benefits (other
than to work site employees).
‘‘(B) SPECIAL EXCEPTIONS IN APPLYING
RULES TO BENEFITS.—
‘‘(i) IN
GENERAL.—In applying any
requirement listed in clause (iii) to a plan
or program established by the certified
professional employer organization—
‘‘(I) the portion of the plan es-
tablished by the certified professional
employer organization which covers
work site employees performing serv-
ices for a customer shall be treated as
a separate plan of the customer (in-
cluding for purposes of any disquali-
fication or correction),
‘‘(II) the customer shall be treat-
ed as establishing and maintaining
the plan, as the employer of such em-
ployees, and as having paid any com-
pensation remitted by the certified
professional employer organization to
such employees under the service con-
tract entered into under section 7705,
and
‘‘(III) a controlled group that in-
cludes a certified professional em-
ployer organization shall not include
in the controlled group any work site
employees performing services for a
customer.
For purposes of subclause (III), all persons
treated as a single employer under sub-
sections (b), (c), (m), and (o) shall be
treated as members of the same controlled
group.
‘‘(ii) 
SELF-EMPLOYED
INDIVID-
UALS.—A work site employee who would
be treated as a self-employed individual (as
defined in section 401(c)(1)), a disqualified
person (as defined in section 4975(e)(2)),
a 2-percent shareholder (as defined in sec-
tion 1372(b)(2)), or a shareholder-em-
ployee 
(as 
defined 
in 
section
4975(f)(6)(C)), but for the relationship
with the certified professional employer or-
ganization, shall be treated as a self-em-
ployed individual, disqualified person, a 2-
‘‘(IV) AUTHORITY.—Such other
similar requirements as the Secretary
may prescribe.
‘‘(iv) WELFARE
BENEFIT
FUNDS.—
With respect to a welfare benefit fund
maintained by a certified professional em-
ployer organization for the benefit of work
site employees performing services for a
customer, section 419 shall be treated as
not listed in clause (iii)(I) if the fund pro-
vides only 1 or more of the following:
‘‘(I) Medical benefits other than
retiree medical benefits.
‘‘(II) Disability benefits.
‘‘(III) Group term life insurance
benefits which do not provide for any
cash surrender value or other money
that can be paid, assigned, borrowed
or pledged for collateral for a loan.
‘‘(v) 
EXCISE
TAXES.—Notwith-
standing clause (iii), the certified profes-
sional employer organization and the cus-
tomer contracting for work site employees
to pay services shall be jointly and sever-
ally liable for the tax imposed by section
4971 with respect to failure to meet the
minimum funding requirements and the
tax imposed by section 4976 with respect
to funded welfare benefit plans.
‘‘(vi) CONTINUATION
COVERAGE
RE-
QUIREMENTS.—For purposes of applying
the provisions of section 4980B with re-
spect to a group health plan maintained by
a certified professional employer organiza-
tion for the benefit of work site employees:
‘‘(I) TERMINATION OF EMPLOY-
MENT EVENTS.—Each of the following
events shall constitute a termination
of employment of a work site em-
ployee 
for 
purposes 
of 
section
4980B(f)(3)(B):
‘‘(aa) The work site em-
ployee ceasing to provide services
to any customer of such certified
professional employer organiza-
tion.
‘‘(bb) The work site em-
ployee ceasing to provide services
to one customer of such certified
professional employer organiza-
tion and becoming a work site
employee with respect to another
customer of such certified profes-
sional employer organization; and
‘‘(cc) The termination of a
service contract between the cer-
tified professional employer orga-
nization and the customer with
respect to which the work site
employee performs services, pro-
vided, however, that such a con-
tract termination shall not con-
stitute a termination of employ-
ment 
under 
section
4980B(f)(3)(B) for such work
site employee if, at the time of
such contract termination, such
customer 
maintains 
a 
group
health plan (other than a plan
providing only excepted benefits
within the meaning of sections
9831 and 9832 or a plan cov-
ering less than two participants
who are employees).
‘‘(II) TERMINATION EVENT CON-
STITUTING A QUALIFYING EVENT.—If
an event described in subparagraph
(vi)(I) also constitutes a qualifying
event under section 4980B(f)(3) with
respect to the group health plan main-
tained by the certified professional
employer organization for the affected
work site employee, such plan shall no
longer be required to provide continu-
ation coverage as of any new coverage
date.
‘‘(III) NEW
COVERAGE
DATE
WHEN
TERMINATION
EVENT
CON-
STITUTES
QUALIFYING
EVENT.—For
purposes of subclause (II), a new cov-
erage date shall be the first date on
which—
‘‘(aa) the customer main-
tains a group health plan other
than a plan described in section
4980B(d), a plan providing only
excepted 
benefits 
within 
the
meaning of sections 9831 and
9832, or a plan covering less
than two participants who are
employees, or
‘‘(bb) a service contract be-
tween such customer and another
certified professional employee
organization 
becomes 
effective
under which worksite employees
performing services for such cus-
tomer are covered under a group
health plan of such other cer-
tified professional employee orga-
nization, other than a plan de-
scribed in section 4980B(d), a
plan providing only excepted ben-
efits within the meaning of sec-
tions 9831 and 9832, or a plan
covering less than two partici-
pants who are employees.
‘‘(IV) EFFECT
OF
CUSTOMER-
MAINTAINED PLAN.—As of a new cov-
erage date described in subclause
(III)(aa), the customer shall be re-
quired to make continuation coverage
available to any qualified beneficiary
who was receiving (or was eligible to
elect to receive) continuation coverage
under a certified professional em-
ployer organization’s group health
plan and who is, or whose qualifying
event occurred in connection with, a
person whose last employment prior to
such employee’s qualifying event was
as a work site employee providing
services to such customer pursuant to
a service contract with such certified
professional employer organization.
‘‘(C) EFFECT OF NEW SERVICE CONTRACT
WITH CERTIFIED PEO.—As of a new coverage
date described in subclause (III)(bb), the sec-
ond certified professional employee organization
shall be required to make continuation coverage
available to any qualified beneficiary who was
receiving (or was eligible to elect to receive)
continuation coverage under the first certified
professional 
employer 
organization’s 
group
health plan and who is, or whose qualifying
event occurred in connection with, a person
whose last employment prior to such employee’s
qualifying event was as a work site employee
providing services to the customer pursuant to
a service contract with the first certified profes-
sional employer organization.
‘‘(vii) CONTINUED
COVERAGE
FOR
QUALIFIED
BENEFICIARIES.—As of the
date that a certified professional employee
organization’s group health plan first pro-
vides coverage to one or more work site
employees providing services to a customer,
such group health plan shall be required to
make continuation coverage available to
any qualified beneficiary who was receiving
(or was eligible to receive or elect to re-
ceive) continuation coverage under a group
health plan sponsored by such customer if,
in connection with coverage being provided
by the organization’s plan, such customer
terminates each of its group health plans,
other than a plan or plans providing only
excepted benefits within the meaning of
sections 9831 and 9832 or covering less
than two participants who are employees.
‘‘(viii) EFFECT OF TERMINATION OF
PEO STATUS.—The termination of a pro-
fessional employer organization’s status as
a 
certified 
professional 
employer
organization—
‘‘(I) shall constitute an event de-
scribed in section 4980B(f)(3)(B) for
any work site employee performing
services pursuant to a contract be-
tween a customer and such profes-
sional employer organization, but
‘‘(II) no loss of coverage within
the meaning of section 4980B(f)(3)
occurs unless, in connection with such
termination of status as a certified
professional employer organization,
the individual formerly treated as a
work site employee performing serv-
ices for the customer pursuant to a
contract with such professional em-
ployer organization ceases to be cov-
ered under the arrangement of the
professional 
employer 
organization
that had been, prior to such termi-
nation of status, the group health
plan of such organization.
‘‘(ix) PERSON LIABLE FOR TAX.—For
purposes of the liability for tax under sec-
tion 4980B, the person or entity required
to provide continuation coverage under this
clause (vi) shall be deemed to be the em-
ployer under section 4980B(e)(1)(A).
‘‘(2) PLANS
MAINTAINED
BY
CUSTOMERS
OF
CERTIFIED
PROFESSIONAL
EMPLOYER
ORGANIZA-
TIONS.—If a customer of a certified professional em-
ployer organization provides (other than through
such organization) any employee benefits, then with
respect to such benefits—
‘‘(A) work site employees of the organiza-
tion who perform services for the customer shall
be treated as leased employees of such cus-
tomer,
‘‘(B) such customer shall be treated as a
recipient for purposes of subsection (n), and
paragraphs (4) and (5) of subsection (n) shall
not apply for such purposes, and
‘‘(C) with respect to such work site em-
ployees, sections 105(h), 403(b)(12), 422, and
423 shall be treated as a benefit listed in sub-
section (n)(3)(C).
‘‘(3) PLANS
MAINTAINED
BY
COMPANIES
IN
SAME CONTROLLED GROUP AS CERTIFIED PROFES-
SIONAL EMPLOYER ORGANIZATION.—In applying any
requirement listed in paragraph (1)(B)(iii), a con-
trolled group which includes a certified professional
employer organization shall not include in such con-
trolled group any work site employees performing
services for a customer. For purposes of this para-
graph, all persons treated as a single employer
under subsections (b), (c), (m) and (o) shall be
treated as members of the same controlled group.
‘‘(4) RULES
APPLICABLE
TO
PLANS
MAIN-
TAINED
BY
CERTIFIED
PROFESSIONAL
EMPLOYER
ORGANIZATIONS AND PLANS MAINTAINED BY THEIR
CUSTOMERS.—
‘‘(A) SERVICE CREDITING FOR PARTICIPA-
TION AND VESTING PURPOSES.—In the case of
a plan maintained by a certified professional
employer organization or a customer, for pur-
poses of determining a work site employee’s
service for eligibility to participate and vesting
under sections 410(a) and 411, rules similar to
the rules of paragraphs (1) and (3) of section
413(c) shall apply to service for the certified
professional employer organization and cus-
tomer.
‘‘(B) COMPENSATION.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), for purposes of sub-
section (s) and section 415(c)(3), or other
comparable provisions of this title based on
compensation which affects employee ben-
efit plans, compensation received from the
customer with respect to which the work
site employee performs services shall be
taken into account together with com-
pensation received from the certified pro-
fessional employer organization.
‘‘(ii) EXCEPTION.—For purposes of
applying sections 404 and 412 to a plan
maintained by a certified professional em-
ployer organization, only compensation re-
ceived from the certified professional em-
ployer organization shall be taken into ac-
count.
‘‘(C) ELIGIBLE
EMPLOYERS.—The provi-
sions of sections 457(f)(1)(A) and (B) apply to
a work site employee performing services for a
customer that is an eligible employer as defined
in section 457(e)(1). The preceding sentence
shall not apply in the case of a plan described
in section 401(a) which includes a trust exempt
be provided through the plan maintained by the
certified professional employer organization.
‘‘(6) TERMINATION OF SERVICE CONTRACT BE-
TWEEN CERTIFIED PROFESSIONAL EMPLOYER ORGA-
NIZATION AND CUSTOMER.—
‘‘(A) IN GENERAL.—
‘‘(i) 
TREATMENT
OF
SUCCESSOR
PLAN.—If a service contract between a
customer and a certified professional em-
ployer organization is terminated and work
site employees of the customer were cov-
ered by a plan maintained by the organiza-
tion, then, except as provided in regula-
tions, any plan of another certified profes-
sional employer organization or the cus-
tomer which covers such work site employ-
ees shall be treated as a successor plan for
purposes of any rules governing in-service
distributions.
‘‘(ii) 
TREATMENT
AS
SEVERANCE
FROM
EMPLOYMENT
AND
SEPARATION
FROM SERVICE.—If a service contract be-
tween a customer and a certified profes-
sional employer organization is terminated,
and there is no plan treated as a successor
plan under clause (i), then such termi-
nation shall be treated as a plan termi-
nation with respect to each work site em-
ployee of such customer.
‘‘(B) DISTRIBUTION
RULES
APPLICABLE
TO SUBPARAGRAPH (A)(ii).—Except as other-
wise required by this title, in any case to which
subparagraph (A)(ii) applies, the certified pro-
fessional 
employer 
organization 
plan 
may
distribute—
‘‘(i) during the 2-year period begin-
ning on the date of such termination (in
accordance with plan terms) only—
‘‘(I) elective deferrals and earn-
ings attributable thereto,
‘‘(II) qualified nonelective con-
tributions (within the meaning of sec-
tion 401(m)(4)(C)) and earnings at-
tributable thereto, and
‘‘(III) matching contributions de-
scribed in section 401(k)(3)(D)(ii)(I)
and earnings attributable thereto,
of former work site employees associated
with the terminated customer only in a di-
rect 
rollover 
described 
in 
section
401(a)(31), and
‘‘(ii) 
after 
such 
2-year 
period,
amounts in such plan in accordance with
plan terms.’’.
(c) CERTIFIED PROFESSIONAL EMPLOYER ORGANI-
ZATION DEFINED.—Chapter 79 of such Code (relating to
definitions) is amended by adding at the end the following
new section:
‘‘SEC. 7705. CERTIFIED PROFESSIONAL EMPLOYER ORGANI-
ZATIONS.
‘‘(a) IN GENERAL.—For purposes of this title, the
term ‘certified professional employer organization’ means
a person who applies to be treated as a certified profes-
sional employer organization for purposes of sections
414(w) and 3511 and who has been certified by the Sec-
retary as meeting the requirements of subsection (b).
‘‘(b) CERTIFICATION.—A person meets the require-
ments of this subsection if such person—
‘‘(1) demonstrates that such person (and any
owner, officer, and such other persons as may be
specified in regulations) meets such requirements as
the Secretary shall establish with respect to tax sta-
tus, background, experience, business location, and
annual financial audits,
‘‘(2) represents that it will satisfy the bond and
independent financial review requirements of sub-
sections (c) on an ongoing basis,
‘‘(3) represents that it will satisfy such report-
ing obligations as may be imposed by the Secretary,
‘‘(4) represents that it will maintain a qualified
plan (as defined in section 408(p)(2)(D)(ii)) or an
arrangement to provide simple retirement accounts
(within the meaning of section 408(p)) which benefit
at least 95 percent of all work site employees who
are not highly compensated employees for purposes
of section 414(q),
‘‘(5) computes its taxable income using an ac-
crual method of accounting unless the Secretary ap-
proves another method,
‘‘(6) agrees to verify the continuing accuracy of
representations and information which was pre-
viously provided on such periodic basis as the Sec-
retary may prescribe, and
‘‘(7) agrees to notify the Secretary in writing of
any change that materially affects the continuing ac-
curacy of any representation or information which
was previously made or provided.
‘‘(c) REQUIREMENTS.—
‘‘(1) IN GENERAL.—An organization meets the
requirements 
of 
this 
paragraph 
if 
such
organization—
‘‘(A) meets the bond requirements of sub-
paragraph (2), and
‘‘(B) meets the independent financial re-
view requirements of subparagraph (3).
‘‘(2) BOND.—
‘‘(A) IN
GENERAL.—A certified profes-
sional employer organization meets the require-
ments of this paragraph if the organization has
posted a bond for the payment of taxes under
subtitle C (in a form acceptable to the Sec-
retary) that is in an amount at least equal to
the amount specified in subparagraph (B).
‘‘(B) AMOUNT OF BOND.—
‘‘(i) IN
GENERAL.—For the period
April 1 of any calendar year through
March 31 of the following calendar year,
the amount of the bond required is equal
to the greater of:
‘‘(I) 5 percent of the organiza-
tion’s liability for taxes imposed by
this subtitle during the preceding cal-
endar 
year 
(but 
not 
to 
exceed
$1,000,000), or
‘‘(II) $50,000.
‘‘(ii) SPECIAL RULE FOR NEWLY CRE-
ATED PROFESSIONAL EMPLOYER ORGANI-
ZATIONS.—During the first three full cal-
endar years that an organization is in ex-
istence, subclause (I) of clause (i) shall not
apply. For this purpose—
‘‘(I) under rules provided by the
Secretary, an organization is treated
as in existence as of the date that
such organization began providing
services to any client which were com-
parable to the services being provided
with respect to worksite employees,
regardless of whether such date oc-
curred before or after the organization
is certified under section 7705, and
‘‘(II) an organization with liabil-
ity for taxes imposed by this subtitle
during the preceding calendar year in
excess of $5,000,000 shall no longer
be described in this clause (ii) as of