Doctor with leased employees

[Guest Pat Metallic]

A doctor uses only leased employees. The leasing organization has a 401(k) safe harbor plan for the leased employees. The doctor would like to put the same kind of plan in place for herself with the same contribution levels so that she is not discriminating.

A representative for the investment firm in which she is hoping to invest plan assets told her that she could not open a safe harbor plan since she was the only employee. She was told that she would need to use a one person 401(k) plan document (solo k) as opposed to a safe harbor adoption agreement.

Are leased employees considered employees for the recipient? If so, does that effect her eligibility for a solo k? Any thoughts or concerns?.

Thanks.

[masteff]

Even if it's a one person plan, nothing to prevent her from using an equivalent formula to safe harbor. Wouldn't that give the same net effect?

[Guest fender5150]

Leased employees are covered in most prototypes correct? Just like members of a union who have collective bargaining agreement.

[rcline46]

You must read the document provisions on Leased Employees - usually found in the definitions section of the basic document for prototypes. You will find some surprises there!

[austin3515]

If these employees a) are in fact working for the Doctor on a full-time basis, and b) the Dr. can hire and fire these people at his/her direction (at which point the employees relationship with the leasing company ends) then what you got is common law employees (as opposed to leased employees) for purposes of administering a plan at least.

If a) and b) are present, and the participants are still included in the leasing companies plan, then they should be administering the plan as a multiple employer plan (that is applying all nondiscrimination testing separately to this Dr.'s employee, without regard to other clients of the leasing company).

However, there is nothing to stop the Dr. from not using the leasing company;s plan, and setting up his/her own safe harbor plan (unless there is something in the leasing agreement to the contrary, which would be surprising).

By the way, the only distinguishing factor between a solo 401(k) and a regular 401(k) is the number of participants. Solo 401(k) is a marketing term only.

[Kimberly S]

"By the way, the only distinguishing factor between a solo 401(k) and a regular 401(k) is the number of participants. Solo 401(k) is a marketing term only. "

Austin, thanks for pointing that out. There seem to be LOTS of folks out there who think this is a totally separate type of plan that prohibits the employer from including employees. Those marketing folks are doing their clients no favors!

[Guest mjb]

If these employees a) are in fact working for the Doctor on a full-time basis, and b) the Dr. can hire and fire these people at his/her direction (at which point the employees relationship with the leasing company ends) then what you got is common law employees (as opposed to leased employees) for purposes of administering a plan at least.

If a) and b) are present, and the participants are still included in the leasing companies plan, then they should be administering the plan as a multiple employer plan (that is applying all nondiscrimination testing separately to this Dr.'s employee, without regard to other clients of the leasing company).

However, there is nothing to stop the Dr. from not using the leasing company;s plan, and setting up his/her own safe harbor plan (unless there is something in the leasing agreement to the contrary, which would be surprising).

By the way, the only distinguishing factor between a solo 401(k) and a regular 401(k) is the number of participants. Solo 401(k) is a marketing term only.

Austin:

In the real world leased employees are always terminated by the employer for whom they perform services because they are told that their employment will end on x date.

[leevena]

If these employees are truly "leased", then they do not work for the physician. I say "truly leased" because there are variations to the level of services provided by these types of companies. Two easy ways to determine if these employees work for the physician or the leasing company is; 1) read the contract, or 2) check the employees payroll information. Leased employees will get their payroll, their W-2's, etc.

[austin3515]

I respectfully disagree. An employee leasing agreement will ensure that employees get a W-2 from the leasing company. However, determining eligiblity under a retirement plan is based on your status as an employee under common law. As I stated before, if the relationship with the leasing company ends when the Dr. fires the employee, they are a common law employee. No contract language will change that.

My brother-in-law is a true leased employee. He works for a company that specializes in private labeling products for companies in a number of industries. HE works on site at his sole client for years at a time and appears to be a regular employee (has an office on site, reports up the chain of command at the client, etc). However, if his client no longer wants his services, he will be reassigned to another client. What's more, the leasing company determines his compensation. Therefore, he is not considered a common law employee of the recipient. He is indeed covered by the leasing company's retirement plan.

Nevertheless, his client must consider him when performing coverage testing, treating him as not benefitting, pursuant to the employee leasing rules. This arrangement is also common for IT employees.

This is VERY important stuff. I don't profess to be an expert, but it is VERY easy to get VERY burned if you don't know the rules!!

[Guest mjb]

Austin: there are many variations of leased employee arrangements where the employee signs an employment agreement with a leasing organziaton and gets paid by and participates in the leasing orgs 401k/health plan but really is controlled by the recipeint. Employee negotiates increase in pay with recipeint and leasing org pays increase to the employee. In most cases if the recipent employer does not want the leased employee's services the leased employee is terminated, not reassigned.

IN most corp it doesnt matter whether leased ees are regarded as employees of the recipient because they are excluded from participation in the recipient employer's plan as a class which is permitted under ERISA. For IRC purposes the employer limits the term of employment to 1 yr or 1.5 yrs or meets the 410b rules for participataion.

[Belgarath]

The odds are that either the employees are common law employees of the Dr. (facts and circumstances) OR they are in fact "leased employees" under IRC 414(n). I suppose they might not have satisfied the requirements under 414(n)(2)(B) and ©, but that's not generally the case.

Austin - your brother-in-law may be covered under the leasing employer's plan, but UNLESS this plan satisfies the requirements of 414(n)(5), then he must be considered under the recipient employer's plan for eligibility and testing purposes. It very well may be possible to exclude him legally and still pass, but he must be included in the testing. As an aside, I've not yet seen a leasing company whose plan satisfies the safe harbor under 414(n)(5) - there may be some, I've just never seen one!

Additionally, under 414(n)(1)(B), any contributions or benefits provided by the leasing company's plan that are attributable to services performed for the recipient employer, are considered as being provided by the recipient employer.

I second Rcline's suggestion to scrutinize the document language - this will set out, very clearly I expect, exactly how they must be treated.

[austin3515]

mjb: These "leased employees" can certainly be covered under the leasing company's 401(k) plan. However, if the arrangement is as I suggested, the leasing company's Plan is a multiple employer plan, and separate testing must be run considering only the Dr.'s employees.

[Guest mjb]

Could you please define the "arrangement" you suggested. It was not very clear. Most leased employees are employed for W-2 purposes by the leasing co and participate in the leasing co 401k/health plans and report to the recipient who directs their work. The recipient employer frequently requires that the leased employee sign an agreement stating that the leaseed employee is not an employee of the recipient employer and is not eligible for benefits under its plans. The recipient's plans contain language that excludes leased employees from plan eligiblity if they are employed/paid by a leasing organization. Most leasing agencies dont have any testing problems because they dont employee any HCE who made over 100k in the prior yr.

[leevena]

I respectfully disagree. An employee leasing agreement will ensure that employees get a W-2 from the leasing company. However, determining eligiblity under a retirement plan is based on your status as an employee under common law. As I stated before, if the relationship with the leasing company ends when the Dr. fires the employee, they are a common law employee. No contract language will change that.

My brother-in-law is a true leased employee. He works for a company that specializes in private labeling products for companies in a number of industries. HE works on site at his sole client for years at a time and appears to be a regular employee (has an office on site, reports up the chain of command at the client, etc). However, if his client no longer wants his services, he will be reassigned to another client. What's more, the leasing company determines his compensation. Therefore, he is not considered a common law employee of the recipient. He is indeed covered by the leasing company's retirement plan.

Nevertheless, his client must consider him when performing coverage testing, treating him as not benefitting, pursuant to the employee leasing rules. This arrangement is also common for IT employees.

This is VERY important stuff. I don't profess to be an expert, but it is VERY easy to get VERY burned if you don't know the rules!!

Austin, I do not disagree with you in general. If you read my comments, I start by saying that there are various variations of this type of employee, and that you should read the contract between the physician and the leasing company. Our company, which is a new start-up, entered into a similar arrangement and leased employees. These employees are not ours, but belong to the leasing company.

[ak2ary]

If the "leased" employees are actually common law employees of the recipient and they are covered by the leasing company's plan, it is not automatically a multiple employer plan. It cannot simply be tested as amultiple employer plan or administered as a multiple employer plan. Those things only happen if the recipient employer is silly enough to sign on as a cosponsor of the leasing company's plan. It is that adoption that makes it a multiple employer plan.

If the recipient does not adopt as cosponsor of the leasing company's plan, and the leasing company's plan covers employees that are later found to be common law employees of the recipient, the leasing company's plan is what is known as a disqualified plan for violating the exclusive benefit rule. (It covers participants who are not employees of the sponsor)

Unless a company is 100% sure as to the validity of the leased status of their leased employees, they should treat them as regular employees. If you don't cover them, account for them in testing. Ignore the "sustantially full time basis" requirement and treat them as employees from day 1. If you want to exclude them as a class, test as you would to exclude any class.

If you are 100% sure that you have a valid leased employee situation consider that, to be a leased employee you must satisfy a bunch of requirements

One is that you cannot be a common law employee of the recipient

Another is that you work at the direction and control of the recipient

But if you work at the direction and control of the recipient, you have passed the IRS primary test for determining if you are a common law employee of the recipient

So, to be a leased employee one requirement says you cannot be a common law employee of the Company and another requirement effectively says you must be a common law employee of the recipient

Some companies understand how this works and do it well. PItney Bowes puts supervisors on-site with their workers, in essence taking over entire mailrooms. Kelly Services puts temporary employees on site (not the "former" employees of the recipient) and the recipient is not privy to how much the employee is actually paid, what the recipients benefits are etc....

I have also seen this "all of the doctor's old staff become his new leased employees" leasing arrangement and it almost never gets to the level of a valid leasing agrreement

[austin3515]

mjb: The arrangement is, Dr. has a medical practice and doesn't want to be bothered with payroll/benefits, etc.. So he finds an employee leasing company to place his employees on their payroll, their benefits etc. The leasing company has no relationship with the individual employees, in that the Dr. alone hires them, and the Dr. alone fires them, and the Dr. alone determines their compensation, and the Dr. alone determiens how they will go about their job. The leasing company's primary role is to process payroll.

I don't care what this is called in any contract, I don't care who the W-2 comes from, I don't care if they participate in the leasing company's 401(k) plan. They are the common law employee of the recipient. Therefore, any new plan of the Dr.'s must include them in coverage testing.

I just remember the word for this: Professional Employer Organization. Do a google search, and you'll find volumes of information of how the IRS forced all of these PEO's to be treated as multiple employer plans for the exact reason stated by ak2ary (i.e., the exclusive benefit rule). The ADP TotalSource is a giant PEO, and they provide the services I described in my first paragraph. I also know that they administer their plan as a multiple employer plan. This is all due to the fact the ADP "employees" were all the common law employees of the recipient.

[Guest mjb]

If the leased employess do not work for more than a yr for the DR would your answer be different?

[austin3515]

The leased employee rules in 414 whatever are totally trumped by an individual's status as a common law employee (as I defined this above). So no, my answer is unchanged. 414 whatever doesn't even come into play with respect to common law employees (no matter whose payroll they are on).

Has no one besides me ever worked with ADP's PEO program?? ADP does this the way I'm describing.

[austin3515]

See the IRS definition of a common law employee in publication 560:

http://www.irs.gov/publications/p560/ch01.html

It says (among other things) "A leased employee can also be a common-law employee. "

Here's the IRS Revenue Procedure on PEO's I referenced. See Section 3.02.

http://unclefed.com/Tax-Bulls/2002/rp02-21.pdf

Is there still any doubt out there?

[Mike Preston]

No. Never has been.

[austin3515]

Mike - does that mean you agree with me?

[Mike Preston]

Of course, don't I always?

[Guest mjb]

The leased employee rules in 414 whatever are totally trumped by an individual's status as a common law employee (as I defined this above). So no, my answer is unchanged. 414 whatever doesn't even come into play with respect to common law employees (no matter whose payroll they are on).

Has no one besides me ever worked with ADP's PEO program?? ADP does this the way I'm describing.

Austin:

Can you clairfy your convoluted statment above and answer the Q of whether a recipient employer for whom a leased employee performs services is required to include leased employees as participants in the recipient employer's retirement plan because they are regarded as common law emplyees under 414(n)?

Mike: Feel free to respond.

[austin3515]

Convoluted?

They must be included unless they can be excluded as a class (i.e., individual on payroll of a third-party) and still pass coverage.

[Mike Preston]

I agree with whatever austin has to say on this subject. If I don't, I'll pipe up.

[Guest Kevin1]

Austin3515 your post #16 is right on. I agree. You have to look back to the basic rules. You just can't call employees something because it's convenient and the contract agreement wording is not final. It's fact and circumstances.