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

• 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

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.

1. 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.
2. 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.)
3. 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.
4. Common Law Employer — The leasing company is the common law employer of the individual based on all the facts and circumstances.

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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.

Copyright 2012, Deloitte.

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