Leased Employee

[Guest mol]

My understanding of the definition of leased employee under 414(n) dictates

1. recipient must pay fee for services of indivdual.

2. the individual must provide service on a substantially full time basis for one year

3. receipient must have primary direction over ind. services

4. the leasing org. must be the common law employee

Under #2 above an employee must complete 1500 hours in a 12 month period.

Employee A meets all of these requirments and is classified as a leased employee for the receipient company XYZ.

XYZ does not exclude leased employees from its 401(k) plan.

XYZ has eligibility requirements to enter its plan of age 21 and 6 months of service with monthly entry dates.

When does employee A (who is over age 21) become eligible to be in the XYZ 401(k) plan? Doesn't he have to wait the full 12 month period and work the 1500 hours in that 12 month period before he can be classified as a leased employee thus even allowing him to be an eligible employee for XYZ's plan? Does

How can there be retroactive entry into a 401(k) plan?

Any thoughts would be appreciated.

[alanm]

I think you are way off the mark. See Revenue proc 2002-21. Receipient must not control the employee. Item 3 and 4 are mutually exclusive. You can't have a leasing organization the common law employer if item 3 is the case.

[Guest mol]

It is interesting you say I'm wrong on the definition of Leased Employee which I took from the 2004 ERISA outline book definition of leased employee - page 1.294.

I was just wondering when this person would be eligible if they qualified as a leased employee.

[mbozek]

How does leased employee participate in recipient's plan if he paid by the leasing organization?

[Belgarath]

It depends upon your plan language, and if the language isn't clear on this issue, then your interpretation. Take a look at IRS Notice 84-11, Q&A-9. Depending upon how you read this, you can let the employee participate immediately, or not. It seems "gray" to me. I think you can make a pretty good argument for NOT including them if they haven't yet satisfied the requirements to become "leased" - assuming no common law service with the recipient employer prior to the leasing arrangement. If you take the more aggressive approach, and bring them in right away, you might want to file for a determination letter.

Caveat - I didn't review the 401(k) proposed (apparently soon to be finalized) regs to see what, if anything, they say on this issue.

[alanm]

The revenue procedure dictates that first you must determine whether the employee is a common law employee under the IRS test. Most times the receipient is the common law employer and the employee must be included in the receipient company's plan. 414 only applies after it is determined the employee is a common law employee of the leasing company; it was written to address the situation like the old Kelley Girl company. I deal with fifty Leasing company plans and have been audited a dozen times on this arrangement. Just calling an employee a leased employee in a contract has nothing to do with their real status. In most cases, the leasing company gets hired, then takes over existing employees of the receipient and calls them leased employees; RP 2002-21 states that they are still the common law employees of the receipient and must be included in the receipient's plan and cannot be included in the leasing company's single employer plan. The leasing company can only offer a multiple employer plan in which each receipient can adopt. The Microsoft case in the 90s is another example where Microsoft(the receipient) tried to call their programmers contractors and exclude them, they were found common law employees of Microsoft. In the above case, I think you are going to find they must be included in the receipients plan, the leasing company is not relevant unless they are a true temp company like Kelly Girl; from the description, it doesn't sound like they are.

[mbozek]

I thought that 414n only requres that a leased employees be counted for nondiscriminaton testing but were not required to be covered by the recipient's plan. See Notice 84-11, Q-14,15 which permits exclusion of leased employees as a class from the recipent's plan. MSFT was required to include independent contractors because the ICs were determined to be "employees on the US payroll" and the 401k plan did not exclude independent contractors from the eligible class who could participate in the plan. Under the Bronk, Dupont, Exxon and Coca-Cola cases, leased employees who perform the duties of common law employees and are excluded from participation in the recipient's plan as a class are not eligible to participate in the recipient's plan.

[GBurns]

I think the question of what mol means by "leasing org." and "leased employee" needs to be determined first so that issues of "Who's the employer" and "multiple employer plan" are understood.

[Guest mol]

I am not in the position to make the determination of who is the common law employer of the employee.

I simply wanted to know if a company has by definition a true "leased employee" - would the leased employee have to work 1500 & 12 months to enter the 401(k) of the receipient company even if the reciepient company's 401(k) had a 6 month eligibility requirement.

[GBurns]

You cannot know anything without knowing what is meant by terms such as "leased employee". The term has more than 1 meaning and the consequences of each are different.

You also could not come to any rational conclusions without establishing who is the common law employer.

[alanm]

Amen