Client is ready to sign a service agreement, drops bombshell

[SteveH]

XYZ LLC is owned 50% by husband and 50% by wife. LLC has about a dozen sales staff.

Subsidiary ABC is owned 1% by above mentioned LLC, and 49.5% by husband and 49.5% by wife. Subsidiary has hundreds of leased employees.

The leased employees receive a W-2 from ABC. They are hired by ABC and then leased to other companies.

XYZ wants to implement a DB plan for the two owners and the dozen sales staff. The comment I heard today was that the hundreds of other employees are just inventory.

From what I can tell it seems like leased employee issues hinge on control. If the recipient company controls the leased employee then they are a common law employee of the recipient company. If ABC controls the employee then they are a common law employee and because of the controlled group they are also going to be covered in XYZ's DB plan.

The problem is that it seems pretty subjective. There isn't any rule out there that you can point to and say with confidence that you are correct.

Any thoughts, help, suggestions? Right now I am just pissed that I have literally been proposing this case for 4 months and we are up to revision 16. Now that the client is finally ready to sign on the dotted line, I get this crap. Maybe it is ok, maybe this is not a problem. Hope, at least I can still have hope...

[SoCalActuary]

This is very fact-intensive, and needs good ERISA counsel.

Can you post these facts to Darrin Watson's column to get more background for the proper answer?

The "inventory" (of very real people with benefit needs and rights) is under the economic control of which parties? The customers or the ABC subsidiary?

The ownership issues look like a controlled group to me. I assume you don't have separate ownership

rights of the two spouses. They take pay from the same company, work with each other, and they don't have sole & separate property rights to their stock.

If the IRS can claim in any manner that the ABC employees are part of the controlled group, you must benefit at least the 401(a)(26) minimum size group, and you must test all of them for discrimination.

At a minimum, raise your fee quote or insist that this is time&charges billing.

[Jim Norman]

Look at Rev Proc 2003-86. Seems this gives a PEO almost a safe harbor to treat the leased out employees as worksite employees as under 2002-21 (treat as employees of the recipient). Of course the facts and circumstances have to support this.

Reverse the situation, if ABC wanted to set up a plan and cover all those employees, the risk would be that they are worksite employees and IRS could challenge the plan on exclusive benefit.

Probably a good idea to get a DL on it.

[Locust]

If ABC is giving the "leased employees" W-2s, it has already made a determination that the leased employees are its common law employees (for income tax reporting and withholding). Plus, ABC is probably telling its clients that the employees are its employees (or at a minimum that the employees have a coemployment relationship with ABC and the client). I think it would be difficult to argue to the IRS in these circumstances that the leased employees are not employees - but it is a factual issue that should be reviewed by a professional. It's a bit odd to have a leasing organization that isn't on top of these issues (or maybe it just likes to live on the wild side).

[Guest Pensions in Paradise]

Sorry, but this seems pretty cut and dry to me. ABC has already determined that the employees are common law employees of ABC, hence the issuance of the W-2s. If ABC is now trying to say these employees are not really common law employees of ABC, the client has some big problems. They need to seek legal counsel immediately.

[JAY21]

I'm not sure the w-2s tell us very much. You would expect the w-2s to be issued under the leasing organization as the "employer of record" for certain purposes like payroll and often health insurance coverage purposes . However, for retirement plan purposes we are to look past this and consider the deeper underlying relationship and control of the employees. Under this analysis ABC may or may not be the employer. I think it's possible that there could be a "co-employer" relationship between the recipient organizations and ABC company, though it's possible the cite that Jim mentioned may give some "out" from this situation. The stakes are high here with this many employees, I don't see it being an easy call or one you'd want to make yourself.

[ERISAnut]

Can of Soda: 65 cents.

Gallon of Gas: $3.00

Appetizer at Friday's: $6.99

Complete fact finding: PRICELESS

[Jim Norman]

I'm not sure the w-2s tell us very much.

Yeah, what JAY21 said. PEO/staffing companies report the employees on their W-2s, but W-2s alone do not make someone a common law employee. Read Rev Procs 2002-21, 2003-86, read all the employee leasing related Q&As here on BenefitsLink under Derrin's "Who's the Employer" column here.

[Locust]

Generally, it is much harder to argue to the IRS that someone is NOT your employee than the other way around, and if you've already told the IRS that someone is your employee by filing a W-2, then I think it will highly unlikely that you could get the IRS to accept a contradictory status based on the "facts."

Plus, if it is a co-employment relationship, the individuals are still employees and would be counted against the plan sponsor in testing the DB plan.

I think Slim has left town for your client's plan, BUT OF COURSE this is a factual issue and perhaps good counsel could help it slip back in.