Leased employees

[Bird]

Company EFG leases its employees from another company, I guess because they think it is easier to process payroll, non-retirement benefits, etc. (To clarify, EFG had its own employees and then one day turned them over to the leasing company. They are clearly under the control of EFG.) I understand that these people are "leased employees" after a year, and if we want to include them in EFG's plan, we simply include "leased employees" and are done.

But they want to include these employees after 2 months, and we think that we need the leasing company to sign on as an adopting employer in a joinder agreement, specifically referencing employees of EFG so as not to include all of the leasing company's employees.

What do you think, are we headed in the right general direction or is there some other way to do this?

[D Lewis]

I am also interested in this question as I'm part of the "we" in "are we headed in the right direction".

Does anybody have any thoughts on this?

Thanks

[Laura Harrington]

Company EFG leases its employees from another company, I guess because they think it is easier to process payroll, non-retirement benefits, etc. (To clarify, EFG had its own employees and then one day turned them over to the leasing company. They are clearly under the control of EFG.) I understand that these people are "leased employees" after a year, and if we want to include them in EFG's plan, we simply include "leased employees" and are done.

But they want to include these employees after 2 months, and we think that we need the leasing company to sign on as an adopting employer in a joinder agreement, specifically referencing employees of EFG so as not to include all of the leasing company's employees.

What do you think, are we headed in the right general direction or is there some other way to do this?

It is very likely that the employees are actually common law employees of Company EFG and not of the leasing organization at all. Have you explored that possibility?

[Bird]

Thanks for the response, Laura - are you saying that by virtue of the employment arrangement, they are, perhaps, not (ever) "leased employees" and should be considered employees of EFG from the get-go? That's nice and easy, but the fact that they are paid by another company must count for something, no?

[Guest Sieve]

Just because they are paid by entity 1 does not mean that are not employees of entity 2. For starters, entity 1 could be acting simply as a common paymaster.

Of course, therein lies the fallacy of the entire leased employee set of rules. One of the requirements of a leased employee is that a leased employee's services "are performed under primary direction or control by the recipient" (IRC Section 414(n)(2)©) when, frankly, that "direction and control" should go a very long way to making the individual an employee of the recipient (the one for whom the services are performed)--that rule would be a principal way to determine if an individual is an employee or independent contractor, for example.

[Laura Harrington]

First a disclaimer...I am by no means an expert on this issue. I just know enough to raise the issue for your to explore.

But yes, it is very possible that those employees are employees of the plan sponsor and not the leasing organization. This especially true in situations where the entire workforce is being leased back to an entity.

Look up Rev. Proc. 2002-21. This Rev. Proc. deals with plans that are sponsored by the leasing organizations, but it will show you that what I am saying is recognized by the IRS as being a possiblity.

Good luck!

[Bird]

Thanks for the feedback; we'll look at the Rev Proc more carefully.