Leased employees

[Guest Pat Metallic]

A doctor uses only leased employees. Currently he makes no contributions on behalf of those leased employees. His current plan's contributions mirror those allowed in the leasing organization's plan; deferrals, safe harbor match, and discretionary profit sharing (3% of pay). The 3% profit sharing is proving not to be enough for the doctor's retirement needs.

Since the profit sharing is discretionary, can he increase his profit sharing to (let's say) 10% for himself and contribute an additional 7% on behalf of the leased employees to make sure that his plan passes coverage?

Any thoughts or concerns are greatly appreciated.

[Guest dbvail]

I'm not sure I like where this may go, but I think you have some issues to consider.

The only way the Dr can exclude these people that are leased through a PEO is if that PEO has a 10% MP plan (with other details). Failing that, these people are in the Dr's plan. The concept of 'mirror' is not in play.

So, as I understand it, the Dr must contribute to his plan the same amounts for his 'leased' employees as he has for himself. That's for all the past contributions he has made for himself....he gets no credit for the plan run by the leasing company. Perhaps he should have leased himself out as well and been covered under that plan. I assume (perhaps incorrectly) that the PEO billed him for the contributions on behalf of these leased people for the match etc. If that is the case, he may end up doulbling up on them.....

I await other input on this, and hope I am have missed something, but I believe the leased people are his as far as his plan is concerned.

Good luck.

[Guest MikeD]

I'm not sure I like where this may go, but I think you have some issues to consider.

The only way the Dr can exclude these people that are leased through a PEO is if that PEO has a 10% MP plan (with other details). Failing that, these people are in the Dr's plan. The concept of 'mirror' is not in play.

So, as I understand it, the Dr must contribute to his plan the same amounts for his 'leased' employees as he has for himself. That's for all the past contributions he has made for himself....he gets no credit for the plan run by the leasing company. Perhaps he should have leased himself out as well and been covered under that plan. I assume (perhaps incorrectly) that the PEO billed him for the contributions on behalf of these leased people for the match etc. If that is the case, he may end up doulbling up on them.....

I await other input on this, and hope I am have missed something, but I believe the leased people are his as far as his plan is concerned.

Good luck.

I assume that, in the example above, the doctor has been testing his plan with the PEO's plan (or portion thereof that covers his employees). If so, and you could pass a cross test based on ages, I think it would be okay to contribute a lesser amount for the employees to the PEO plan than the doctor is contributing for himself in his plan. However, testing would have to be satisfied. It would be the same situation as if the doctor maintained two plans for his employees and there was no leasing company in the picture.

[Belgarath]

Just an added citation - take a look at IRC 414(n)(1)(B). Contributions made under the leasing organization's plan are treated as made by the recipient employer IF they are attributable to services performed for the recipient employer.

[Guest Kevin1]

Pat: Objectively, who is the common law employer of the doctor's staff? The Doctor or the leasing company?

[Guest dbvail]

I assume the plan document contains all the language needed to cover these people, and it always has contained that language. It also might have had cross testing formulas in place. (Just being a bit of a sceptic)

As far as the common law issue is concerned, I have understood that for purposes of a qualified plan, it is the Dr's practice, not the PEO.

The Dr could have adopted the PEO's plan and had himself and all his employees in it. But he didn't, and this is maybe an example of why 414 and Controlled Group rules were put in place.

In regard to 414(n)(1)(B) the Dr would probably be be billed for the cost of the employee contributions, and that is deductible as a business expense. He could use that in testing, but I still am uncomforatble with the plan language issue.

Bottom line, if he wants more, he has to consider the employees.

[Guest Pat Metallic]

Kevin, all of the doctor's staff is leased and are common law employees of the leasing organization.

If the recipient organization (the doctor) can use the leasing organization's contributions in his testing (again ADP/ACP are a moot point since the plan is safe harbor), can he increase his own profit sharing to 10% and make a 7% profit sharing to those affected leased employees so that they are also getting a 10% profit sharing (3% from the leasing org and 7% from the doctor)?

The nonstandardized safe harbor adoption agreement currently does not allow leased employees to participate but that provision could be amended.

Thanks.