Including "leased" ee's who don't meet 414n

[AlbanyConsultant]

A client hires professional employees on a temp-to-perm basis, and would like to have them covered by their very generous plan from the day they start as "leased" employees (they want it to be a selling point to attract the employees). That's in quotes because these employees are (almost always) hired as "real" employees usually 90 - 180 days from the day they walk in the front door.

So... while these employees are employed by the employement agency, they are not employees of the sponsoring employer, so they can't be in the plan. And I can't call them "leased" employees because they don't meet the 1 year discussed in 414(n)(2).

Is there anyway to get these employees (or should that be in quotes?) into the plan? The company is trying to be more generous, and is shocked that it is so difficult to do so. Thanks.

[Guest mjb]

why dont you think they can be covered now? Why does the 1 year rule prevent them from being included as participants?

[AlbanyConsultant]

The way I read 414(n), the employee has to be employed for 12 months as a leased employee in order to be considered as an employee of the plan sponsor. The employees in this case don't make it that long as leased, they become "real" after 180 days at most. So I can't just say "immediate entry and leased employees are included".

Do you have a different interpretation?

[PLAN MAN]

A retirement plan is for the exclusive benefit of the employees of the employer. If the employer does not want to hire these individuals as employees and pay them W-2 wages, then they cannot be included in the plan.

[Guest mjb]

There is case law under ERISA which has required a recipient employer to include leased employees as participants in the recipiant employers plan. Is that illegal?

[Steelerfan]

So... while these employees are employed by the employement agency, they are not employees of the sponsoring employer, so they can't be in the plan.

Is there anyway to get these employees (or should that be in quotes?) into the plan? The company is trying to be more generous, and is shocked that it is so difficult to do so. Thanks.

The common law test is used to determine whether these individuals are employees for purposes of the plan, regardless of who pays them and regardless of how it is reported (except that these are factors to be considered). If the test is satisfied, they can be in the plan. All the facts and circumstance of the relationship need to be analyzed and counsel should be retained to make an opinion. The case mjb refers to I think (probably) is the famous Microsoft case. If I recall correctly the ee's were temps who were determined by the court to be employees and so should have been included in the plan.

There might be a practical problem if they aren't on the employer's payroll.

[Steelerfan]

P.S. note that based on the facts you gave, the likelihood that these people are employees in the first place is high, e.g., they are under the dominion and control, etc., of the employer and after the probation period when they become official nothing really changes. This can be a trap for the unwary--depending on how the plan is drafted, there is a risk that not including them in the plan is a violation a la Microsoft.

[Guest mjb]

P.S. note that based on the facts you gave, the likelihood that these people are employees in the first place is high, e.g., they are under the dominion and control, etc., of the employer and after the probation period when they become official nothing really changes. This can be a trap for the unwary--depending on how the plan is drafted, there is a risk that not including them in the plan is a violation a la Microsoft.

SF -what MS case are your referring to??? There were three MS cases and in the third case the employees' claims for benefits under the 401k plan were dismissed by the 9th circuit appeals court and remanded back to the MS plan administrator for review. MS then settled the case but only for those contractors who were eligbile to participate in the MS employee stock purchase plan under IRC 423. No benefits were paid under the 401k plan. You know something I dont know?

The case I was referring to is Burrey v. Pacific Gas and Electric, 159 F3d 388, where the 9th circuit held that a plan definition of employee included leased employees defined in IRC 414(n)who performed services for the recipient emplmoyer.

[Steelerfan]

Vizcaino v. Microsoft, (1997), 120 F3d 1006. (Common law employees are included for 410(b) coverage purposes.). Leased employees who meet the definition are also included.

A class of workers who signed an agreement when hired that they were independent contractors not eligible for employee benefits, but who were later retroactively classified by IRS as employees for withholding and FICA tax purposes, were improperly excluded from participating in the employer's employee stock purchase and 401(k). The employer accepted the IRS determination on audit that the workers were employees based on the common law control test, but argued that the terms of the plans and the employees' hiring agreements prevented their participation. The Ninth Circuit disregarded the hiring agreements and held that the workers should have been permitted to participate in the stock purchase plan. The court sent back to the 401(k) plan administrator the issue of whether the 401(k) plan's exclusion of employees who were not on Microsoft's U.S. payroll applied to the freelance workers, even though they were employees.

The moral of the story is that if an individual is an employee under the common law test, an agreement can't override the test--it is what it is and the employer can't do anything about it. If you can pass the coverage test with an exclusion for temps (who are otherwise CL employees) then you will be ok. If you would fail the coverage test, then you would have to make retroactive contributions for them.

[AlbanyConsultant]

Over the weekend, I found Derrin Watson's "Who's the Employer (3rd ed.)" on-line. Chapter 4 seems to indicate that these employees are in general to be considered employees of the recipient organization (the plan sponsor) - see especially Q 4:43. Though Q 4:7 - 4:9 do seem to make a distinction between a "leased" employee and a "worksite" employee, I think his point about having to count all the compensation and service is still the same.

[Steelerfan]

There's also a rev rul that discusses who would be a worksite employee and how to apply the control test. but the bottome line is you can't know who the employer is without applying the dominion and control test to determine who the employees are under the common law. Looking at it from who the employer is seems confusing to me because it's not like there is any law or definition of what an employer is, other than the plan would define employer as the sponsor. that doesn't really add much to the analysis.

[Locust]

I believe there is a rule under 414(n) that says that once an individual who would be a leased employee if he or she worked for a year becomes an employee you must aggregate their service as an employee with their service with the leasing orgainization in determining whether they were a leased employee, and if they turn out to be a leased employee, all of their service with both employers counts as service for purposes of the plan.

I know that some plan sponsors have extended this concept so that the service with the leasing organization is immediately counted in determining eligibility in the plan once the individual becomes an employee. In a sense the plan is interpreted as saying that service with a leasing organization is counted in determining eligiblity for the plan once the individual becomes an employee. I'm comfortable with this on the basis that it is acceptable to count prior service with another employer when there is a connection with the other employer, and this is what is happening in this situation.

[Steelerfan]

I know that some plan sponsors have extended this concept so that the service with the leasing organization is immediately counted in determining eligibility in the plan once the individual becomes an employee. In a sense the plan is interpreted as saying that service with a leasing organization is counted in determining eligiblity for the plan once the individual becomes an employee. I'm comfortable with this on the basis that it is acceptable to count prior service with another employer when there is a connection with the other employer, and this is what is happening in this situation.

The way I interpret the rules for your facts is that the individuals always were the employees of the plan sponsor, otherwise you couldn't count their prior service for eligibility. That's part of the point I'm trying to make in this post. That's the reason for applying the common law test to determine who is an employee. You count the service because they were actually employees from the beginning, even though paid by a third party and even though the employer didn't treat them like employees. When you say "once the individual becomes an employee", it's more like the completion of a formality-they already were and now they'll be on the payroll. Most employers in my experience never really get this concept. There's not as much choice as employers like to think there is.

[Guest mjb]

The way I read 414(n), the employee has to be employed for 12 months as a leased employee in order to be considered as an employee of the plan sponsor. The employees in this case don't make it that long as leased, they become "real" after 180 days at most. So I can't just say "immediate entry and leased employees are included".

Do you have a different interpretation?

IRS Notice 84-11: Q -9 Will a recipient's retirement plan be denied qualification if the plan covers an individual who would otherwise be a leased employee but for the fact that the individual does not meet the "substantially full time" standard?

A- No. In the case where the recipients retirement plan covers an individual who would otherwise be a leased employee for the purposes of IRC 414(n), but such individual does not meet either of the tests in answer 7 for determining "substanitaly full-time", (e.g., performance of service for more than 1500 hours) the plan will not lose its qualified status or otherwise be denied qualfiication.

[Steelerfan]

Why are you trying to fit them into the "leased employee" rules of 414? They do not appear to be leased employees as that term is defined in the code. Aren't they basically temporary employees until made "real." If so, the IRS guidance on determining who common law employees are is the appropriate guidance, not the leased employees rules.

[AlbanyConsultant]

I wasn't sure what to call them initially; I started with 414(n) because it seemed like a good starting place. But I think you've made it clear that they aren't "leased" at all.

Thanks to all - I've dumped this all back on the client's lap and recommended they hire an ERISA attny to sort this out - we can write the doc to fit however the attny calls it.