Eligibility - previous employer

[Guest JPIngold]

Just hoping people will tell me I don't have a discrimination problem.

I have a doctor (of course) who was in a 5-person practice. She is leaving that practice to open a specialty practice. None of her new employees worked in the old practice. If we set up a new plan in the new practice and recognize service with her old practice, are we being discriminatory???

Thanks.

[Jim Chad]

I will start the discussion by throwing my SWAG out there.

I think no problem or testing required. But it really is a SWAG. I have nothing to base it on.

[Kevin C]

If I understand the situation correctly, I think you have discrimination issues. This is a new entity with an owner and some employees. The new plan would grant prior service credit for service with an unrelated entity that only the owner worked for. So, for the first year, only the owner would participate. If nothing else, I think the timing of the amendment (or adoption of a new plan with this provision) is discriminatory. It's a facts and circumstances determination under 1.401(a)(4)-5(a). Others may disagree.

[Guest JPIngold]

If I understand the situation correctly, I think you have discrimination issues. This is a new entity with an owner and some employees. The new plan would grant prior service credit for service with an unrelated entity that only the owner worked for. So, for the first year, only the owner would participate. If nothing else, I think the timing of the amendment (or adoption of a new plan with this provision) is discriminatory. It's a facts and circumstances determination under 1.401(a)(4)-5(a). Others may disagree.

This was my thought also --- was hoping someone would tell me I'm worrying over nothing.

I think I have found another way out. The doctor is leasing her 3 new "employees". They are definitely not her common law employees and will have to work for a year to become "leased employees" under the terms of the document. Therefore, if I just waive the one year requirement for all EMPLOYEES employed as of the start date of the entity, she will be the only eligible participant.

Thanks for your input. It is good to know for the future.

Happy New Year.

James

[Kevin C]

The doctor is leasing her 3 new "employees". They are definitely not her common law employees ...

I've never come across a situation with one of our clients where the entire office staff were not common law employees. Can you elaborate on how that works?

[Guest JPIngold]

The doctor is leasing her 3 new "employees". They are definitely not her common law employees ...

I've never come across a situation with one of our clients where the entire office staff were not common law employees. Can you elaborate on how that works?

This is a specialty practice. There is a group out there that manages this type of specialty practice. Basically, they hire and train staff to operate the practice so all the doctor has to do is practice medicine. The doctor basically shows up and does her thing and the employees report to the management company, get reviewed by the management company, are trained by the management company, are only able to be fired by the management company. The doctor has virtually no control over these employees. (Now, granted, if she hates one of them, I am sure she can strongly suggest to the management company that she would like that person replaced, but her agreement says she has no authority to fire an employee.) So, it seems to be a classic leased employee situation where they are not common law employees of the doctor. In fact, a leased employee can't be a common law employee.

Lets put it this way, I've spent a few hours pouring over Derrin Watson's book today and I think I have this interpreted correctly. If you think I am off my rocker, please let me know.

[Kevin C]

I don't think you're off your rocker. I've just never seen that kind of set-up before. I've had a few doctors tell me they don't have employees any more because they are all leased. My first question is who hires and fires them? The doctors have always answered "I do".

That's the great thing about this site. I'm always learning something new.

[K2retire]

If I understand the situation correctly, I think you have discrimination issues. This is a new entity with an owner and some employees. The new plan would grant prior service credit for service with an unrelated entity that only the owner worked for. So, for the first year, only the owner would participate. If nothing else, I think the timing of the amendment (or adoption of a new plan with this provision) is discriminatory. It's a facts and circumstances determination under 1.401(a)(4)-5(a). Others may disagree.

This was my thought also --- was hoping someone would tell me I'm worrying over nothing.

I think I have found another way out. The doctor is leasing her 3 new "employees". They are definitely not her common law employees and will have to work for a year to become "leased employees" under the terms of the document. Therefore, if I just waive the one year requirement for all EMPLOYEES employed as of the start date of the entity, she will be the only eligible participant.

Thanks for your input. It is good to know for the future.

Happy New Year.

James

It's my understanding that waiving eligibility can cause discrimination issues and that's why it is no longer allowed in prototype documents.

[Guest JPIngold]

I don't think you're off your rocker. I've just never seen that kind of set-up before. I've had a few doctors tell me they don't have employees any more because they are all leased. My first question is who hires and fires them? The doctors have always answered "I do".

That's the great thing about this site. I'm always learning something new.

I think that is the key question. CONTROL. Who has ultimate control. In your case, it sounds like you can ignore the term lease .... they are their common law ee if they do the hiring and firing. In my case (and this is the first case I have had that sounds legit), I think I truly have LEASED employees. I can't exclude them because I would fail coverage (unless I look into permissively aggregating this plan with any plan sponsored by the management company .... but that is another subject altogether!!!)

[Guest Sieve]

Crediting prior service can be discriminatory, especially when establishing DB plans. The service crediting non-discrimination rules are at Treas. Reg. Section 1.401(a)(4)-11(d)--and those rules are in addition to the discrimination rules resulting from a plan amendment (which also apply when the plan is established per 1.401(a)(4)-5(a)). Unfortunately--or fortunately, depending on your point of view--the rules are facts & circumstances based.

A Dr. might want to bring one staff member along at the start, waive service requirements as of a certain date, and then hire others later. Crediting prior service isn't usually a big deal for vesting, because the Dr. can termiante the plan to produce full vesting when merging with another practrice or closing up shop.

By the way, prototype plans--Corbel included--permit crediting past service and waiving eligibility service.

[My 2 cents]

The potential for unacceptable discrimination arises from the fact that the doctor's new plan is not granting service to the people who worked at the OTHER employer whose service is being counted for the doctor. Consider - if the prior practice is linked closely enough to the new solo practice that service there should count for the doctor, why wouldn't the new practice provide any benefits to others whose coincident service was indistinguishable from hers? In a more normal situation (ongoing entity establishing new plan), the facts and circumstances problems would come from longish-service employees (who would have been vested had there been a plan) whose employment ended before the effective date of the new plan and who will receive nothing, but the key person(s) would be getting credit for the same period of time. Possibly same thing here but involving different ownership structures.

Counting up to 5 past years should get safe harbor treatment. After that, you're on your own.