moving from common law to leased employee

[Guest Livia]

An employee who was covered under employer's 401(k) Plan accepted a position in another of the employer's offices. However, the new office is run by an agency. Those employees are paid by the agency which is reimbursed by employer/plan sponsor. Participant terminated employment with plan sponsor and is no longer on any of plan sponsor's benefit plans. Instead he is covered by the agency's benefit plans. Participant wants a distribution from the 401k plan. Is this a severance from employment under Code SEction 401(k)(2)(B)(i)(I)? We are asking because the individual would still have to be credited with service as a leased employee. Since this participant is fully vested, it is not an issue in this case. Would the answer be different if the participant was not fully vested and still accrued vesting service as a leased employee?

[Ron Snyder]

Since the employee is still treated as employed by the group for testing purposes, this is NOT a severance from employment under Code Section 401(k)(2)(B)(i)(I). That employee will remain in the current plan until a distributable event takes place, or until he is eligible for rollover to the new employer's plan. Whether or not he participates in the plan sponsored by the agency, he will be included in the testing group (at least after 12 months of leased employee service) along with the other leased employees.

Whether or not he will continue to vest depends on the specific plan provision addressing that issue.

[ERISAnut]

(at least after 12 months of leased employee service)

This statement alone deserves very detailed attention in addressing your issues.

A leased employee is an individual who:

1) Is NOT a common law of the receipient.

2) Is a common law employee of the leasing organization

3) Works on a substantially full time basis for a 12 months for the receipient

Substantially full time basis is presumed to mean 1500 hours or 75% of the work schedules typically performed by actual employees. You may also reference Rev. Rul. 87-41 for the 20 factors when considering common-law employment.

Now, an individual is not considered a leased employee of the receipient until the conditions above are met. This is despite the fact that he may have been a previous employee of the receipient. The determination in question is whether or not he is a 'leased employee' at any time during the current year. Until such time as he becomes a 'leased employee' he is considered as having a 'severence from employment' from the actual reciepient for qualified plan purposes, even though he may continue to work at the same desk with no 'separation from service'.

The semantics here are important to understand when attempting to address all your issues as your document will typically use many of these terms.

[Kevin C]

Is this "agency" a PEO? My first reaction from reading your post is that the person is likely still a common law employee of the employer.

[ERISAnut]

Is this "agency" a PEO? My first reaction from reading your post is that the person is likely still a common law employee of the employer.

That was actually my first reaction as well; major questions.

[masteff]

Would the answer be different if the participant was not fully vested and still accrued vesting service as a leased employee?

Speaking only to this piece of the question.... A participant can leave employment while not fully vested, earn additional service as a leased employee, and thereby become vested. (Just be sure to apply the "leased employee" requirements correctly as noted above.) I had this happen in the real world.

[Guest Sieve]

I agree that even if this individual isn't yet a leased employee because he/she hasn't been "leased" for at least 12 months, the individual probably remains a common law employee of the employer during that time period and therefore has not severed employment and is not permitted to take a distribution (i.e., there is no distributable event). ERISAnut's earlier post suggested that during that 12-month period before becoming a leased en employee, the individual would have a severance from employment, but, to the extent he meant that a distributable event occurred, I would disagree--especially since the PEO plan is considered a plan of the recipient.

As an aside, I wonder why we (including the IRS) fool ourselves into thinking that these leased employees really are anything other than common law employees of the recipient organization to begin with. Congress participated in this fairy tale by requiring a leased employee to be "under primary direction or control by the recipient" (IRC Section 414(n)(2)©). Shouldn't that pretty much make the employee a common law employee of the recipient organization (even though it doesn't meet the multi-layered IRS test of an employee)? And there is an exception to the rule requiring only employees to be covered by an employer's plan, by saying that the non-employee, who works under the same conditions as an employee, is treated as an employee (IRC Section 414(n)(1)(A)). And any plan is a plan of the recipient, even if established by the PEO for the benefit of employees who are "leased" by the recipient. The whole concept is convoluted and illogical--in my opinion--so much so that the leased employee proposed regs have long-ago been withdrawn and not re-proposed, and we have proposed regs dealing with a "leased owner" (Prop. Treas. Reg. Section 414(o)-(1)(B))--now that's a concept for the ages.

[ERISAnut]

ERISAnut's earlier post suggested that during that 12-month period before becoming a leased en employee, the individual would have a severance from employment, but, to the extent he meant that a distributable event occurred, I would disagree--especially since the PEO plan is considered a plan of the recipient.

Sieve,

I see what you are saying, but you missed one point. I didn't make an actual determination of whether the individual is a common law employee of the receipient or a common law employee of the leasing organization. I merely communicated that in order to address the question, you must first make an accurate determination using those rules I outlined.

You are actually making the determination. I do not disagree with your determination, but remained careful not to make it. I would normally push the actual determination of employee status off to the employer because it is their ass on the line if they get it wrong.

My second response was that the PEO thoughts came to mind, but I didn't speak to those. I actually avoided it because the framework lies with making a real determination of whether the individual is a common law employee of either organization.

[Guest Sieve]

Then I must have misunderstood the next to last paragraph of post #3 of this thread, which is what I was responding to

I certainly didn't mean to attribute to you a conclusion that wasn't yours. We all (excuse me . . .) . . . I spend enough time supporting the conclusions I reach on my own.

And, by the way, my rant in the last paragraph was not directed at anyone in particular, and certainly was not based on your post. I (obviously) just have great difficulty with the entire legal fiction underpinning leased employees.

[ERISAnut]

Nothing taken as a rant. You cannot possibly have anything to apologize for. Your comments show that you actually 'think'; and that is a reflection of strength.