exclusion of seasonal employees

[EGB]

I have a client that wants to handle large influxes of business by entering into an agreement with a temp agency to use the temp's employees until the the influx has been handled and to thereafter no longer use the temp employees. The influxes are sporadic and the temps are needed for varying periods of time. When the temps are working for the client, the client has full control over what the temp does each day and what hours the temp works.

The client wants to amend its 401(k) plan to exclude these temps from participation.

I understand the IRS Field Directive which states that part-time/seasonal employees cannot be excluded if they achieve 1,000 hours. Could these individuals potentially be excluded for the following reasons: First, an argument could be made that they are really the employees of the temp agency. I know that there are many factors that go into making a determination of whether an individual is an employee and that there are no clear answers. I also understand that you should do your best to make the individuals employees of the temp agency (e.g., have an agreement that states the agency is the employer, responsible for benefits, hiring, firing, etc). Second, even if they are the client's employees, could they be excluded as a reasonable classification without violating Section 410(a) (as explained in the Field Directive), the argument being that you are not excluding them because of their length of service, but rather because you only needed them for a particular influx of work or project?

I am uncomfortable with excluding them. However, I would like to know what others are doing with this situation. The client feels strongly about excluding them because they tend not to defer into the 401(k) which hurts its 401(k) and (m) testing.

I assume that this is a very common situation. I just wanted to see what other companies are doing and how typical is it to exclude these types of individuals.

[M R Bernardin]

Draft an amendment to exclude them using a nondiscriminatory classification, as you were suggesting. For example, the Plan excludes anyone hired to assist with short-term work fluctuations, etc. (maybe call them persons classified as "influx workers") Then submit the plan to the IRS for a determination letter. Explain to the client that the language might not be approved and what the consequences will be if the IRS objects (e.g., having to possibly contribute a QNEC for those excluded). The IRS may approve the exclusion and the client would have reliance. It has happened before.