Employee leasing is a popular concept. The leasing company, or Professional Employer Organization (PEO), provides the paperwork, payroll, human resources, and/or benefits to the employees who work for one of their clients’ businesses. The issue as to who is considered the actual “employer” comes into question when the company for whom the employee reports to work each day is not the one involved in producing his or her paycheck. For retirement plan purposes, what must be determined is: which entity is considered the “common-law employer” of the employees?
DETERMINING THE COMMON-LAW EMPLOYER
A leased employee is a person who receives a paycheck from one employer, a “staffing firm”, but is performing services for another company, a “recipient company”. Which of the two companies is actually considered the employer for purposes of the retirement plan? A leased employee will be considered common-law employee of the recipient company if each of the following occurs:
- The worker is assigned on a long-term basis to the recipient company
- The recipient company makes the hiring and firing decisions about the worker
- The recipient company determines the worker’s rate of pay
- The worker’s services are provided under an agreement between the recipient company and the staffing firm
- The worker has performed services for the recipient company on a substantially full-time basis for at least one year, defined as:
- 1500 hours of service in a year, or
- A number of hours of service at least equal to 75% of the average number of hours that are customarily performed by an employee of the recipient company in a particular position.
- The worker’s job is supervised and performed under the primary direction of the recipient company
RETIREMENT PLAN COVERAGE RULES FOR COMMON-LAW EMPLOYEES
If the worker is considered the common-law employee of the recipient company, then the worker is covered under the recipient company’s retirement plan for testing purposes as outlined below.:
- Participation and coverage requirements (§401(a)(3), §401(a)(26), and §410)
- Workers are counted in the coverage tests of the recipient company’s plan once the worker is considered a Leased Employee.
- Leased employees, as a class, may be excluded from participation, but not to the extent that the coverage testing fails (no more than 30% of the workforce)
- Leased employees may be excluded under a Safe Harbor IF leased employees represent fewer than 20% of the recipient company’s non-highly compensated workforce OR the staffing firm provides a money purchase plan with a 10% employer contribution that is 100% vested immediately.
- Nondiscrimination rules (§401(a)(4))
- The Actual Deferral Percentage test and Actual Contribution Percentage tests required for 401(k) plans fall under this compliance provision.
- Vesting requirements (§401(a)(7), and §411)
- Contribution and benefit limits (§401(a)(16) and §415)
- A worker can be covered under the staffing firm’s retirement plan, only if the recipient company co-sponsored the staffing firm’s plan.
- Any contributions made to a plan maintained by the staffing firm count as contributions to the recipient company’s plan, but not vice versa.
- Compensation limits (§401(a)(17))
- All compensation earned by the worker while working for the recipient company
- SEP and SIMPLE rules (§408(k))
- Top heavy rules (§416)
- Exclusive benefit rule (§401(a))
- Deduction limits (§404)
An employer cannot contract away its ultimate obligation and responsibility for wages and taxes to another organization, and thereby escape all liability for its workers. As an extension, just because an employee is paid through a leasing company, it doesn’t mean that the employee isn’t counted when it comes to participation in a company’s retirement plan.
Independent contractors may also fall under the leased employee rules too. Most outside consultants who have their own business (e.g., attorneys, accountants, actuaries, doctors, computer programmers, systems analysts and engineers) would generally not be considered leased employees because they are not subject to the “primary direction and control” of the employer.
RULES AND REGULATIONS
Official rules about leased employees are outlined in Internal Revenue Code §414(n) and Notice 84-11. Revenue Procedure 2002-21 addresses Professional Employer Organizations (PEOs).
These rules were put in place to prevent manipulation of eligibility for retirement benefits. There are dozens of nuances to the rules, and it requires careful consideration to be sure that in the event your company has leased employees to determine if those employees might be considered your common-law employees.
Don’t try to wade through these regulations on your own. One of our pension consultants would be happy to review your situation and give you guidance. You may also wish to have your situation reviewed by an ERISA attorney.
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