Leased Employee & leasing company can't do pre-tax deferrals

[Dennis Povloski]

I have a medical group that has one receptionist that is a leased employee. The leasing company says that it does not have the ability to do pre-tax withholdings for the employees that it leases.

The leasing company does have a 401k plan for employees that physically work for the leasing company (like in its corporate office, for example), but the employees that it leases to other organizations are not covered under this plan.

I've never dealt with this before. Does anyone have any suggestions for dealing with this if the receptionist wants to defer into the medical practice's plan?

[QDROphile]

Would it be too horrible to contemplate the possibillity the individual is a common law employee despite the leasing formalities? And will it ruin your life or the life of the medical practice to confront this possibility?

[Jim Chad]

I think that she may be an employee of the medical practice for Qualified Plan purposes. She might will be a worksite employee. Rev Proc. 2002-21, I think will have your answer. But I highly recommend Derrin Watson's book "Who's the Employer" It is much easier ot understand.

Whether she defers or not, you need to know if she has to be included in testing.

[Dennis Povloski]

I believe that she needs to be included in the testing, but I'm not sure of the mechanics of getting her to make a deferral, and then transmitting it to the plan. The ERISA Outline Book suggests (although no formal guidance is given) that the medical practice may be able to reduce it's fees to the leasing company by the amount of the deferral, and then transmit the funds to the plan, but the leasing company would still have to prepare her W-2 accordingly (and they say they can't), so I'm kind of at a loss on this one.

Fortunately, this is a safe harbor plan, so I don't have an ADP test, but effectively this whole set up doesn't allow her to defer even though the plan says that she can. Does that make this become a benefits, rights, features problem?

[rcline46]

If the leasing company is doing deferrals on 'inside' employees, they can do it for all employees. In my humble opinion, they are lazy, prevaricating, or both.

[Jim Chad]

One other question: Does the document exclude leased employees? If it does, do you pass coverage testing when including her as a zero?

If the document does not exclude her, you are legally required to let her defer and give her the Safe Harbor contribution.

[Dennis Povloski]

She's definitely included, and she's my only NHCE (yeah). The safe harbor is the non-elective, so she'll definitely get that regardless of her deferrals.

Reed - thumbs up on your humble opinion!

[401king]

She's definitely included, and she's my only NHCE (yeah). The safe harbor is the non-elective, so she'll definitely get that regardless of her deferrals.

If she will is eligible to receive the SHPS contribution, doesn't that mean she's eligible to defer? It's my understanding that 99% of the time, eligible for one means eligible for the other (with regards to SH contributions and deferrals).

[Dennis Povloski]

Yes. She is eligible to defer. I just can't figure out how I'm supposed to get her deferrals into the plan since the leasing company "is not able" to process a pre-tax withholding for the employees it leases out.

The medical practice is fine with her deferring, but since she's employed (and paid by) the leasing company, I don't know how to get the deferrals into the plan. That's the heart of my problem.

[Jim Chad]

Here are the alternatives I see the employer having to choose among:

1. Have a plan that will not pass DOL or IRS audit.

2. Tell the leasing company to figure out how to do it or get another leasing company.

3. Somebody pay a CPA to do her payroll.

4. Have the leasing company reduce her gross compensation and pay a CPA to do "zero net checks". This is an ugly workaround. The w-2 will probably be screwed up at least half of the years.