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Company X has 10 employees. 2 are owners. 8 are leased employees. What are the problems with Company X having a 401(k) Safe Harbor Plan? Can leased employees defer to this plan or must they defer to a plan of the leasing organization? If they defer to a plan of the leasing organization can Company X contribute a Safe Harbor Match to this Plan using deferrals contributed under the leasing organization plan, or can they contribute the Safe Harbor Match to the leasing organization firm and get "credit" under the Company X Plan? I suspect that the best route would be the 3% Nonelective from the Company X Plan deposited to the leasing organization firm's plan. Any and all thoughts are appreciated. Thanks!

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

ERPA, QPA, QKA

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The big question is whether or not they are considered employees by the IRS. If they are, this company can have its own Plan and cover the 'leased' employees as well as the owners.

If you want to exclude the leased employees, that gets more complicated and I recommend you look in either the ERISA Outline by SAL Tripodi or the book "Who's the Employer" by Derrin Watson.

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Guest Offender

Honestly, how could these leased employees not be considered employees of Company X? I'm sure there is a scenario, but unlikely. So I think the best route would be to allow them participate in Company X's 401(k) plan.

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Thanks for your 2 replies.

I'm quite sure that under coverage testing these leased employees must be considered as employees. We also know that we can use contributions under the plan by the leasing organization for testing of the plan maintained by Company X. I reference the explanation of this topic as found on page 1-12 of "The ASPPA Defined Contribution Plan Series Volume 3: Advanced Compliance and Administrative Topics". I now see that I did not phrase my question properly. I was too broad in scope. Sorry.

On this same page it notes that guidance on leased employees participating in the recipients plan is a topic that lack adequate formal guidance. For this reason (and others) I am not using a plan of the recipient for the leased employees. However, it does say that (1) we can count contributions under the plan of the leasing organization for testing applicable to the recipient's plan, and (2) we can have matching contribution under the recipient's plan based on deferrals under the leasing organizations plan.

I have two questions. First, can we do a 401(k) Safe Harbor for the Recipient using deferrals under the leasing organization plan, with match going to recipient's plan? In effect, will the avodiance of testing still apply even though deferrals and match go to different plans? I know we can do this with a Nonelective 3% Contribution, but will this work with a Match? Second, are there other problems to be aware of when you have this type of arrangement in place. That is, what potential problems exist when you have deferrals under the leasing organization's plan but matching under the recipient's plan. Clearly, my original post was not clear in this regard. Again, sorry.

Anyway, given my clarification, any suggestions would be appreciated. Thanks!

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

ERPA, QPA, QKA

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Does your client co-sponsor the leasing company's plan? Do any of these "leased" employees work for any other clients of the leasing company? If the employees are determined by the IRS to be the common law employees of your client and NOT employees of the leasing company, which is a common common result, the leasing company's plan is covering people who are not employed by the plan sponsor and may not be a qualified plan.

The IRS gave these plans an out a few years ago by allowing them to make their plans multiple employer plans by having the recipient organization adopt them,or by allowing the recipient employer to spin off his employees from the Leasing Org plan and set up his own single employer plan without the leasing org. That program is over and , from what you describe, your leasing company did not avail themselves of it.

If all of this is correct, your clients workers are either common law employees of your client (who sets their pay and their hours and provides their work tools and can hire and fire) or of the leasing company (who sets their pay and their hours etc etc...). If they are the common law employees of your client, then the leasing ciompany plan is likely not a qualified plan so your client can't use it for testing. if they are the common law employees of the leasing company, which is VERY VERY rare, then your arrangement can work as above and you can use the leasing company plan as part of the safe harbor

But please please check with a lawyer

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Excellent post. Thank you. Well the situation is that the leasing company's lawyer told the leasing firm to set this up. It is a NEW plan. I am having problems given my understanding of some of the points you raised. What I am now fuzzy on is whether the leasing organization can set up a MEP? Your post seems to indicate no, and that the recipient must be the plan sponsor of a stand alone plan. Are you sure about that? Also, if the leasing organization wants to have a plan it appears that they would not need to cover any of the leased employees. Is that correct? If so, the owner of the leasing organization has no employees and can have a plan solely for his benefit?

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

ERPA, QPA, QKA

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The leasing company can setup a MEP with the recipient employer as co-sponsor.

Assuming the leasing company plan is new and has no contributions, then the recipient can sign onto that and all should be well.

If the leasing company had operated the plan as a single emplooyer plan for a few years, then it is likely not a qualified plan and having the recipient sign on now is likely no help, but a new MEP should work.

Make sure you are working with someone who has worked with them.

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Thanks AK2. I have alot of experience with MEPs. Not so much with leasing organizations. Not quite zero, but close.

The Plan is brand new. Originally, I thought this was to be a MEP, but then I was told no. I tentatively express concerns, but you have confirmed my arguments and positions in my mind. Thanks.

I am getting the sense that the leasing organization, which has 2 owners, will only have 2 employees for plan purposes. For testing purposes, the "units" will be each separate recipient employer. Am I correct in saying that those 2 owner employees will be the only participants for the leasing organization? Basically, for ADP Testing of the leasing organization we only have those 2, who can defer whatever 402(g) and 415 will support?

The leasing organization does not want to allow the principals of the recipient firm to participate. This is easily addressed by the adoption terms for the MEP, but I then am left with the quetion of what to do with those principals. Can they have a 401(K) Safe Harbor for themselves, but have a Safe Harbor Match go to the MEP for leased employees? Given what I posted right before your first post I believe this is okay, but I am still unsure about using a Match versus the Nonelective for this purpose. Is use of Matching valid in this scenerio?

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

ERPA, QPA, QKA

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At the end of the day, the answer to all of those questions depends on who the common law employer of the workers is. The PEO/Leasing world has argued time and again that they are either the employers or co-employers of the workers.

Without knowing the circumstances I can't comment on your particular situation, but in the situation where the recipient employer is clearly real employer, you would aggregate the MEP benefits with the recipient org plan. But you also have to worry about what happens if the leasing co really is the employer or co-employer. Then the leasing co would have to count the workers too.

Seems to me the best way to go is that both Leasing and Recipient setup safe harbor plans, based on the same employee contribution (the leasing Co plan should be a MEP cosposored by the recipient), that way no matter who the employer may be, the employer is a sponsor of the MEP covering the employees and whether they have to be aggregated or not, the plans meet coverage and nondiscrim, for whichever group may be found to be the employer.

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Your recommednation is perfect, and demonstrates why this forum is valuable to the small TPA. I agree wholly that the question of "who is the employer" is crucial. And yes, in this case the leasing firm has unshakable conviction that they are the employer. Jim Chad's advice also sounds good at this time. Again, my thanks for all replies.

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

ERPA, QPA, QKA

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