Termination of Leased Employee Status

[Guest BBowles]

An employee leasing company (i.e. a company who hires employees, is responsible for all payroll taxes, workers compensation premiums, etc. of employees who actually work at companies which pay the leasing company a monthly all-inclusive fee) maintains a 401(k) plan for all employees it hires. There are several companies that utilize this service and all employees are covered under the plan.

One business decides to terminate the services of the leasing company. They, of course, want the 401(k) contributions (which they have paid for) to be turned over to them for rollover into their plan. The Plan Administrator takes the position that the employees have resigned (they signed forms to that effect) and that their contributions are forfeit, as per the plan documents.

Assuming their has not been a partial termination, does anyone have any thoughts as to which is the correct position?

[MWeddell]

I'll give this question a shot, but caution that I've not worked with any leasing companies, so someone else may have more experience with this situation.

The question is whether the employees have experienced a separation from service within the meaning of IRC 401(k)(2)(B). It sounds like employees perform the same work at the same physical location, but one day they no longer are employed by the leasing organization but instead are directly employed by the host company. The current IRS position, called the same desk rule, is that (at least as it pertains to the 401(k) contributions) the employees have not separated from service.

If that's the case, then the leasing organization can't process distributions (except for hardship or age 59-1/2 or some other valid reasons) to those employees until they terminate employment with the host company. If the host company is willing to take these participants' accounts in a plan-to-plan transfer (which is not a rollover), then (1) make sure the host company's plan will preserve all optional forms of benefit payment, and (2) if the plan has a vesting schedule, consider the cost of losing potential future forfeitures (which will now be in the host company's plan) versus the administrative hassle of tracking whether employees have terminated with the host company.

[This message has been edited by MWeddell (edited 12-01-98).]