Top Heavy Test and leased employees

[emmetttrudy]

A group of physicians started a 401(k) PSP. They lease employees from a hospital and the leased employees participate in the hospital’s 403(b) plan.

I know that we must include the leased employees deferral and match contributions from the 403(b) plan in the 401k Plan's tests (ie ADP/ACP test). I also know that contributions to the 403b plan can be included in the 401k Plan top heavy testing.

What I don’t know is whether or not we can include the leased employees total 403b account balances in the 401k Plan top heavy test. In other words, can we include the leased employee 403b account balances for the entire period they were leased by this group or can we only include new monies to the employee 403b accounts since the inception of the physician 401k plan? The physicians have leased these employees prior to the inception of the 401k Plan.

[ETA Consulting LLC]

You are asking the wrong questions. The first question should be 'who is the employer' with respect to each plan. Keep in mind that merely leasing an employee from an organization doesn't make them a leased employee, there must be work on substantially a full time basis for one year. However, in order for that definition to apply, the employee cannot meet the definition of a common-law employee. There's a revenue rulling 97-41 that outlines the 20 factor test in making this determination.

I would begin the analysis there before I actually engage in how the plan will be tested. You have to know, exactly, who the employee of the employer sponsoring the plan.

Good Luck!

[Guest Scott012]

I am working with emmetttrudy on this issue and wanted to make it clear that only the employees of the physician group are benefitting in the 401(k) plan. The employees in the 401(k) plan are all employed by X. The leased employees in question have met the substantially full time requirement and are employed by Y.

While both groups have different employers, my understanding is that the leased employees have to be included in the ADP/ACP and top heavy testing of the physician's 401(k) plan.

The pension answer book says that when calculating the top heavy ratio, the recipient employer includes the contributions or benefits the leasing organization provides to the leased employees to the extent the benefits are attributable to services performed for the recipient, even though those contributions or benefits are not actually accrued under the physician's 401(k) PSP.

The question is, when calculating the top heavy ratio, can we use monies in the leased employees accounts that existed prior to the start of the Dr's 401(k) Plan (as long as the monies in their account were accumulated while they performed services for the recipient).

Thank you