Leased Employees = not fun

[Guest smhjr]

I have a situation where a professional worked for a large manufacturing corporation (corporation G). He recently branched off from the corporation and began his own company (Sole prop V). Corporation G was going to discontinue and out source this small segment of the corporation so the Vice President of the segment has branched off on his own. The employees that worked for him at the corporation are now working for him at his new company. The segment deos some sort of highly specialized plastic fabricating.

The odd thing is that the owner worked out some sort of deal with Corporation G to keep the employees on their payroll and he would lease them. The reasoning was that he would not be able to provide health benefits to the employees because he is a much smaller operation. Obviously this is not a typical situation and I am quite surprised the original corporation agreed to keep the employees on their payroll.

I have a situation where the employees have been common law employees of Corporation G for many years and continue to receive their paycheck from Corporation G. Sole Prop V pays the salary and an additional fee that is used to pay the health and retirement plan costs for the leased employees to Corporation G. Now the sole prop is looking to add a 401(k) profit sharing plan. The participation and benefits provided are not high enough to the leased employees at Corporation G for the owner of Sole Prop V to generate any meaningful retirement benefits.

I have received all of the pertinent information to determine that there is no control group or affiliated service group issues. I am waiting on the answer of whether the sole prop owner was ever an owner of Corporation G. He definitely is not an owner now.

The kicker is that the employees of Corporation G did not begin their work for Sole Prop V until 8/1/2004. This means they are not eligible for any retirement plan at the new company until 2006 if we use a standard 21 and 1 year of service. The sole prop has been in existence long enough because it was used to receive some consulting salary throughout the years (although the income was small in comparison to now) that the eligibility could be written so that the owner is eligible to begin participating right away.

The problem I am having is that these employees were working with the Sole prop owner previously. From their point of view nothing has changed except they moved to a different office location. They still have the same employer, they still do the same job, they just work in a different location. I feel like I should consider the employees eligible for the new plan instead of waiting till 2006.

In talking with someone in my office their comment was, "He didn't have ownership in that other company so as far as he is concerned they could have been working for Genreal Motors. There is no reason to look at them any other way than as newly leased employees."

I can kind of buy into that, but it doesn't feel right. If we can wait until 2006 then the owner can take advantage of higher contirbutions until then and we can take a new look at the design once the leased employees need to be factored into the discrimination testing.

Any thoughts? Any questions I still need to get answers to that I am not considering?

[GBurns]

In my opinion these employees might not even be employees of Sole Prop V any at all. The fact that he compensates Corp G might be regarded as a fee for service rather than a lease. Which raises the question of whether or not Corp G can legally lease employees? Although someone is going to state that the Corp G artiles probably states "any and all" as type of business, there is still the state law requirements regarding "Leasing Companies" along with Workers Comp, Unemployment liability, Health Insurance and General Liability insurance issues.

If these employees are in a different location, Whose WC and General Liability covers them?

Who covers Unemployment Claims?

Is the Health Insurance provider aware that the employee location has changed?

If Corp G cannot "lease" the 401(k) issues are moot.

If Corp G can legally "lease" but other the other liability issues rule against it, it is also moot.

By the way, Have you considered the employee reaction when they find out that they are getting Sole Prop V 401(k) instead of Corp G 401(k)? What will be done when at that time they discover that they are not (and have not been for some time) employees of Corp G??????? What do you think the State UC Office will say when the first ex-employee files against Corp G then everyone discovers that there is something called Sole Prop V??? The same for the first OSHA or WC incident???

The timing or eligibility for a 401(k) seems of no consequence.

[Alf]

Are the workers his common law employees or are they employees of G? That could go either way, I suppose, but my guess is that they are his common law employees. If they are his employees I don't think they can be "leased employees" can they? I would run down the PEO rules for sure because the term is not defined by the IRS and these sound like worksite employees.

[Guest smhjr]

I guess I never questioned whether or not they were actually leased employees. The client filled out the census request indicating that these employees were leased so i didn't question it.

It seems to me the way they have set it up is to intend for them to be treated as leased employees. The Sole prop V is the one that has ultimate control over their job functions but yet they pay Corp G for their services. I won't pretend to know the in and outs of this, but how is that different than Administaff or any other of the human resource type companies.

But that is not really for me to determine the legalities of what they are doing with the employees. I just need to figure out if they should be considered eligible in the sole prop retirement plan. Regardless of whether they are common law employees or leased employees there really isn't a difference when it comes to plan eligibility and the benefits provided. If they are leased employees and eligible I need to test the benefits provided by the "leasing company" and compare them to the sole prop benefits. If they are common law employees then I need to cover them in the plan.

The way I see it, both scenarios boil down to when are the employees eligible? I suppose if you look at the employees as fee for service then they would never be eligible, but since the client came to me with the impression that they would be eligible I don't think it's my place of expertise to argue with him.

[Guest Pensions in Paradise]

But that is not really for me to determine the legalities of what they are doing with the employees.

...but since the client came to me with the impression that they would be eligible I don't think it's my place of expertise to argue with him.

With that type of thinking, please let us know the eventual outcome when you get dragged into court by either the employees and/or the plan sponsor.

You need to make it clear to the plan sponsor that the proper classification of the employees has a large impact on the operation of the plans. Not only his plan, but Corp G's plan also. If these employees are still covered by Corp. G's plan and are later determined to be employees of the Sole Prop., then the Corp. G plan could be disqualified.

You should require that the Sole Prop provide you with a legal opinion as to the status of the employees. If he is not willing to do that, then you may want to consider cancelling your services.

[GBurns]

I do not understand why you think that you can "gloss over" the Who's the Employer issue.

If they are employees of Corp G, How can they be eligible for Sole Prop's Plan?

What about the other employees at Corp G?

If they are eligible for Sole Prop's Plan, From what payroll will elective contributions be deducted?

If they are eligible for Sole Corp's Plan because of the "leasing" then that would mean that they are really Corp G employees. Does this mean that BOTH Corp G and Sole Prop will have to sponsor the 401(k) Plan? If so will you have a multiple employer plan?

I do not see where eligibility is even to be considered until the Employer-Employee issue is determined.

Following and accepting what the employer tells you will not absolve you from liability. Ask your E&O carrier.

[Guest smhjr]

Maybe I worded the prior post badly, but what I meant is that I am not the guy's attorney or his CPA. Nor am I the attorney or CPA for Corporation G. If they haven't figured these things out already then they have lots of problems with or without me. They haven't asked me to determine the status of the employees and if they did ask, I wouldn't do it. I would tell them to find someone else.

If the employees aren't leased employees then the deferral and match for the last payroll has already given Corporation G a lot of problems.

Right now all I have is a request for a proposal for the sole prop. My style is to get something in front of him to hopefully get excited about before I start giving him all the negatives.

So we are back to the original question. Assuming the employees are leased then when would I have to begin testing the benefits they are receiving at Corp G with the sole prop plan? I am thinking it would be 1/1/2006... maybe it should be right away though.

The broker is still trying to get a definitivie answer, but he thinks the sole prop owner was at one time a 10% owner of the corporation. The broker believes that his interest was sold in 2002. Would the testing date be changed if he indeed was at one time an owner of Corporation G?

[Guest Moe Howard2]

Let me see if I understand.

1) The corp is is the common law employer of the workers.

2) The corp leases the workers to the sole-proprietor.

3) The workers are leasaed employees (which means they meet all 4 requirements of Sec 414(n)(2).

4) The workers are all presently participants in the corps's retirement plan.

5) The sole-proprietor wants to establish a 401(k).

Are any of the above untrue?

How can the workers be "leased employees" if they have not yet worked for the sole-proprietor for at least 1 yr (full time at 1500 hours) ... see Sec 414(n)(2) ?

What kind of plan does the corp have?