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:
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.:
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
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).
SUMMARY
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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