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Excluding Leased Employees


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If a client's plan is excluding leased employees, do you check to see if:

A person shall not be considered a Leased Employee if: (i) such person is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined in Code section 415(c)(3), but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross income under Code sections 125, 402(e)(3), 402(h)(1)(B), 403(b), 132(f) or 457, (2) immediate participation, and (3) full and immediate vesting; and (ii) Leased Employees do not constitute more than 20 percent of the Employer's nonhighly compensated work force.

I never thought to ask if their leased EEs are covered under a MP.

And what is the second part saying?  Leased EEs must make up more than 20% of the workforce in order to be considered leased and able to be excluded?


Two wrongs don't make a right, but three rights make a left.

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This comes the safe harbor of 414(n)(5). What it is saying is that, if the leased employee is covered by the leasing org's MPP (which meets the requirements given), then you do not have to treat them as as leased employee of the recipient org (your client), but solely as an employee of the leasing org. In other words you can disregard them for plan purposes.

I've never asked a client about it because it seems unlikely (to put it mildly) that a leasing org would sponsor such a plan.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.

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Agree with @BenefitsPerson.   More likely the employees are common law employees.  Not really sure how you get to a "leased employee" determination in the wake of Rev Procs 2002-21 and 2003-86.

Even if you did get there, I've never seen the requisite MP plan. 

I carry stuff uphill for others who get all the glory.

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Some leased employees are covered by the required 10% money purchase plan by the lessor in order to be able to work in a particular market, or for a particular employer. An employer that has a lot of leased employees that it does not cover in its plan can be concerned about minimum coverage and so, beyond a certain point, will ask that additional leased employees that it take on be covered by a safe harbor money purchase, so that they don't have to worry about them. Think, for example, a large company, say a utility, with a rich legacy DB where the employer responds to changing market requirements by freezing participation in the DB (but not benefit accruals) and hiring lots of leased employees. Over time, participation and coverage become a problem, but the DB is sufficiently rich that it is worth protecting by providing decent benefits to the leased workforce. Note that the 20% limit (i.e., the safe harbor works for the lessee only if leased employees do not exceed 20% of its workforce) is determined without counting the individuals covered by the 10% MPPP as leased employees. Note also that the language quoted is from the LRM. It has read that way for over 20 years, but the actual statutory requirement in 414(n)(5)(B)(iii) says that ALL of the lessor's leasable workforce must be covered by the 10% MPPP, and I have never understood why the IRS has ignored that requirement, but it seems to do so both in the LRM and in enforcement.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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There are several steps to looking at a leased employee exclusion.

1. First of all, a worker who is leased is not a "leased employee" UNTIL he works for the employer on a substantially full-time basis for at least 1 year. If the individual has been a leased worker for less than 1 year, he is not yet a "leased employee".  Meaning he is not considered at all for plan purposes. (I am not getting into any discussion about whether someone may have been categorized as leased when in fact he is a common law employee..)

2. Once the leased individual works substantially full time for at least 1 year, he is a "leased employee"  -- EXCEPT that he is not a "leased employee" IF he is covered under the leasing employers MPP and the "leased employees" do not make up more than 20% of the nonHCE workforce.  (see Luke's comments above about how to determine 20%).  So, if the worker is not covered under a  MPP of the lessor, then at this point he is a "leased employee" and must be considered for plan purposes.

3. The "leased employee" will now either be allowed into the plan the same as any other employee or the plan may excluded "leased employees".  But that exclusion, like any other, must be tested to comply with the coverage rules.

Hopefully I have not misstated any of this, but please comment if you don't agree or want to add additional thoughts. 

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