Loans from 401(k)

[Guest msearle]

If a sub S corporation leases all of its employees, including its owners, can the owners participate in the leasing company's 401(k) plan and borrow against their contributions? The leasing company uses a Multiple Employer Plan, and the sub S corporation has signed an adoption agreement specifying particulars of the plan that is applicable to them. (The adoption agreement still meets the qualified status). The leasing agreement does all the payroll for the sub S corporation and many others, so the leasing company could claim the sub S owners as their employees. Can these employees loan from the plan?

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[Guest Dook]

First, I don't know how the leasing company could claim the owners as employees just because they do their payroll. The IRS's control test determines who the employer is.

Second, the plan has been set up as a multiple employer plan, so there is recognition there of separate employers.

There is a separate entity, it is a sub-S corporation, therefore those shareholder employees may not take a loan from the plan without DOL PT approval.

[Guest Phil L]

This is an interesting situation. The very starting point for any employer's plan is determine which people are truly its employees. It seems like a stretch that an owner of a company isn't an employee of the company he owns, but is claiming to be an employee of the leasing company. I beleive there are court cases and IRS rulings on this very issue. If I remember correctly, the conclusion was that the leasing company was primarily performing a payroll function for the owner's company.

In order for the people to be considered employees of the leasing comapny, the leasing company would have to provide direction and control over the employees. Is it even possible for the leasing company to give direction and control to the owner of another company?

A great book on this subject has been written by S. Darrin Watson, an attorney. The book is called Who's the Employer. I've read about half of the book which deals with related issues as well.

Phil

[Alf]

I agree with Dook. If the leasing company was really the common law employer of all of the employees, it wouldn't be sponsoring a multiple employer plan.

Nevertheless, assuming that the leasing company IS really the legal employer of the owners and that the leasing company and the recipient company are not aggregrated under the Code section 414 rules, there is no reason to deny loans to the owners because of the prohibited transaction rules. I don't think that a "co-employment" (whatever that means) relationship would change this answer unless the leasing company and the recipient were treated as one entity under Code section 414 rules.

[Guest msearle]

Thanks for your input

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