Leasing Company has a 401k -

[Guest Effie Clark]

We have a potential new client who leases his employees from a leasing company that offers a 401k plan.

The employer wants to take the employees back from the leasing company and open a 401k safe harbor for 2003 (he currently has a straight PS plan.)

Here is the question, does the fact that the leasing company offers a 401k to the employees prohibit the employer from adding a 401k safe harbor to his current PS plan for 2003?

[Ron Snyder]

Not at all. In fact, under the new IRS regulations, it is pretty much inconsequential whether the employees are "leased", since IRS considers PEOs to be payroll services. Applying the common law tests, the employees work for the recipient employer and can only be covered under a plan of the true, recipient employer. Of course that could be provided through a PEO firm if and only if the PEO offers a true multiple-employer plan. But the plan can be provided through the true employer whether or not the employees are leased.

[austin3515]

Expanding on what veba brought up, you should definitely make sure that the PEO is handling the 401(k) the right way. The IRS came out with some policies/interpretations of the exclusive benefit rule that really screwed the PEO's. Like veba was saying, if the plan was not a multiple employer plan, the employees participating could have some very significant impacts - i.e., if the Plan is ultimately disqualified.

The revenue ruling is 2002-21.

http://www.irs.gov/pub/irs-drop/rp-02-21.pdf