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Guest Article

(From the January 17, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Compliance Initiative Finds Most Plan Sponsors Are Correctly Applying the Leased Employee Rules

In its recent "leased employee" compliance initiative, the IRS found that most qualified retirement plan sponsors are correctly applying the leased employee rules.

The Project Summary reports that operational defects were found with only a few plan sponsors, who generally elected to voluntarily correct their mistakes under the EPCRS program. (The IRS took additional enforcement action in a small percentage of cases that appeared noncompliant.) Fully one-fourth of the plan sponsors were found to have correctly applied the rules. Somewhat surprisingly, 65 percent of the plan sponsors were found to have incorrectly indicated that they used leased employees (i.e., by checking Box 3F on Form 5500).

The summary notes that leased employees are required to be treated as common-law employees for purposes of several qualification requirements:

Minimum Participation under Code § 410(a)
Minimum Coverage under Code § 410(b)
Nondiscrimination under Code § 401(a)(4)
Minimum Vesting under Code § 411
Limitations on Contributions and Benefits under Code § 415
Compensation Limit under Code § 401(a)(17)
Top Heavy Requirements under Code § 416

Failure to properly treat individuals as leased employees can have a harmful ripple effect on plan compliance, as the IRS explains:

If leased employees are not properly treated for plan purposes, they will be excluded from participation and related plan benefits. Additionally, demographic results may be skewed so that testing is incorrectly performed, limitations are improperly calculated and discrimination in favor of highly compensated employees (HCEs) may occur.

A separate IRS release explains that a worker is a leased employee under Code § 414(n) if four requirements are met:

Agreement — The individual's services are set out in an agreement between the recipient company and the leasing organization, and require the recipient to pay a fee to the leasing organization.
Service — The individual provides services to the recipient company on a substantially full-time basis for at least one year and at least 1,500 hours during any 12-month period. (If the individual works for a company related to the recipient company, the individual's work with the related company counts in meeting these service requirements. Also, if the individual was a common law employee of the recipient before becoming a leased employee, that service counts in meeting these service requirements.)
Direction or Control — The recipient company has primary direction or control over the services performed by the individual. Factors examined include direction and control over:
- when, where and how the services are performed,
- whether the services are performed by a particular person,
- whether the recipient supervises the services, and
- whether the services must be performed in the order established by the recipient.
Common Law Employer — The leasing company is the common law employer of the individual based on all the facts and circumstances.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.