401(k) sponsor converts to employee leasing

[Guest Mike Kimball]

Have a client with a existing 401(k) plan. he will be moving all his employees into a leasing company arrangement so all the employee tax reporting etc. will be handled by the leasing company. I'm thinking that my client should term his 401(k) because they all want to be in the leasing company 401(k). I do not know if the leasing company has a multiple employer plan or if my client (soon to be former!) will be a co-sponsor of the plan or exactly how the leasing company plan will "cover" employees working for a recipient. This situation seems to be occuring frequently with the increased popularity of the leasing concept. I wonder what other questions to ask and if they should term their existing plan? Anybody already resolved these issues?

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[Ervin Barham]

I have not resolved all of the issues you are asking, so I may be of limited help here. Usually, the leasing company has a 401(k) plan that the "employees" of your client will be eligible to participate. Your client is not a co-sponsor, but just gets billed for any matching contribution, etc., depending on the arrangement.

In the cases I have seen, I find out this stuff after the've already done this so you have no chance to plan.

You are going to run into the sucessor plan issue on 401(k) distributions if the plan is not handled correctly. The leasing company usually will not want to merge your client's plan into their plan for obvious liability reasons.

Terminating the plan prior to any takeover by the leasing company may prevent this - however, it should be looked at carefully, as this is a land mine!

Any other thoughts out there?

[Guest Mike Kimball]

Ervin: the thing that bothers me is how, if the courts are saying that leased employees are the common law employees of the recipient, how can "non-employees" participate in the qualified(?) plan of the leasing company? they are not employees and the exclusive benefit rule says q.p. must be be for exclusive benefit of employees. The multiple plan approach or the co-sponsoring approach might fix this but I'm still working through those. Anybody else have ideas or cites??

[Ervin Barham]

I'd be interested in hearing an answer from the leasing company's perspective - interesting question.

I'm sure someone has worked through this as these arrangements are becoming more popular.

[Guest ndt123]

I work with several large PEOs (1,000+ ERs and 20,000+ EEs), and 99.9% have decided to treat themselves as a multiple employer plan with seperate testing for each "employer".

However, the largest PEO that I work with has determined that it is a single employer plan with one test. They tell me they've spoken to the IRS, and that their approach is o.k., but it's the only one I've seen that does not treat itself as a multiple ER plan.

[Guest Mike Kimball]

ndt123: I wonder what "speaking" to the IRS means? I would certainly want to have a determination letter on the plan. If the employees are deemed to remain employees of the recipient, and recipient "signs up" on the leasing org's multiple employer 401(k) plan, have we run afoul of the 1 year prohibition in the 401(k) regs on establishing a 2nd 401(k) plan??

[Guest ndt123]

I don't know that a determination letter does anything here...it most likely won't address whether the adopting employers are truly unrelated or not.

I agree that there are risks here, but they have made that determination and they are directing us to test it as a single employer.

Besides...the thought of performing 1,000 20 life ADP tests makes my skin crawl.

[Guest Mike Kimball]

ndt123: I was wondering why my skin itches so much. That's about what we are faced with every year because we only do plans under 100 lives.

I agree with you about the determination letter not addressing the issue specifically. Probably have a very nice caveat letter on that one!!!

[Guest JPCMPLS]

I had several clients enter into PEO contracts last year. In each instance the PEO had a turnkey 401(k) program to offer to its clients. The client was treated as an adopter of a multiple employer plan. For those clients that already had plans, the documents were amended and restated into the new program. Assets then transferred to the new investment company. No terminations, distributions or same desk issues came into play. I am still not 100% certain of the IRS position on these arrangements, but various federal agencies have adopted the co-employer theory. If direction and control is the test, the client should be able to operate a plan for its leased employees and test it separately for coverage and benefits.