Leased employees

[Guest JPIngold]

I am using Derrin's book to help me through a situation and am wondering if I am interpreting it correctly. Any input would be most welcome.

I have a client who adopted a safe harbor cross-tested 401(k) plan. It is a husband and wife physician practice. They may have traditional employees at some point, but for now, they have 4 individuals they are leasing from another organization. The doctors have virtually NO control over these individuals. The leasing organization trains and sends out these individuals to practices with a similar specialty. They hire them, fire them, control their hours, manage them, train them. I truly believe they are the common law employees of the leasing organization. That organization has also adopted a safe harbor 401(k) plan and is allowing them to defer and is making 3% SHNEC's on their behalf. My client pays a fee to them to cover their payroll, related taxes and benefits.

The way I am reading Derrin's book, my client's plan will consider these leased employees as participants for coverage, top-heavy, nondiscrimination testing, 415 limit, etc. purposes. My client will make a safe harbor contribution for them in the practice's plan based on their compensation paid by the leasing company. For 401(a)(4) purposes, I can use the safe harbor contribution made to the leasing org's plan in my figures for employer contributions in the practice's plan. So, in my case, they will be treated as receiving a 6% employer contribution (3% to one plan and 3% to the other plan). We won't have ADP/ACP testing because the safe harbor is being met. Top heavy isn't a problem (unless we have mid-year entry) and the 3% in both plans doesn't cover 3% of their annual pay.

Any problems with my comments and/or any other warnings I should be thinking of???

Thanks.

James

[ETA Consulting LLC]

The way I am reading Derrin's book, my client's plan will consider these leased employees as participants for coverage, top-heavy, nondiscrimination testing, 415 limit, etc. purposes.

Only after they've worked for your client for one full year. Remember, the definition of "Leased Employee" requires the services to be performed 'on substantially a full-time basis' for a year. Until such time, they will not be counted as "leased employees" under your clients plan. However, after such time, they will be.

My client will make a safe harbor contribution for them in the practice's plan based on their compensation paid by the leasing company. For 401(a)(4) purposes, I can use the safe harbor contribution made to the leasing org's plan in my figures for employer contributions in the practice's plan. So, in my case, they will be treated as receiving a 6% employer contribution (3% to one plan and 3% to the other plan). We won't have ADP/ACP testing because the safe harbor is being met. Top heavy isn't a problem (unless we have mid-year entry) and the 3% in both plans doesn't cover 3% of their annual pay.

Any problems with my comments and/or any other warnings I should be thinking of???

Thanks.

James

Provided that these leased employees perform services for only your client, then 'any' contribution they receive under the leasing organization's plan will be considered as contributed by your client; so you are correct.

Good Luck!

[Guest JPIngold]

Thanks! Yes, on both points I noted such in Derrin's book. The individuals in question are only working for my client and did so throughout 2011, so they have now satisfied these requirements.

I appreciate your input.

James

[jkdoll2]

In the ASPPA Defined Contribution book - it says the employer (the doctors) would have to have control over the leased employees to consider them in the plan.

Under IRC 414(n):

[*]The recipient must be paying a fee for the services of the individual

[*]The individual must be providing services on a substantially full time basis for at least one year

[*]******The recipient must have primary direction or control over the individual's services and

[*]The leasing organization, not the recipient, must be the common law employer of the individual

So I guess I question the 3rd point for leased employees.

Thanks

[Guest JPIngold]

Good point. I will verify this with the doctors.

This is always tough, because it would be nice to exclude them altogether (e.g. if they don't meet #3), but it would seem like the conservative approach would be to include them. It seems like the IRS would have less motivation to pick a fight if I call them leased employees than if we leave them out altogether.

[jkdoll2]

Good point. I will verify this with the doctors.

This is always tough, because it would be nice to exclude them altogether (e.g. if they don't meet #3), but it would seem like the conservative approach would be to include them. It seems like the IRS would have less motivation to pick a fight if I call them leased employees than if we leave them out altogether.

I would just verify the control issue - the IRS is funny sometimes and they may not think that is the conservative approach - it depends on the auditor. They may thiink they are getting to much benefit. Thanks

[00hskrgrl]

Any problems with my comments and/or any other warnings I should be thinking of???

Agree with the others on the primary direction & control question. This is important to verify. If they don't meet the primary direction & control requirement, then giving them a contribution in your client's plan could violate the exclusive benefit rules. Also, if they receive a 3% contribution in your client's safe harbor plan, shouldn't they also have the option to make deferrals to that plan?

You might look further into the PEO rules. Based on the facts presented, it sounds like the leasing org might really be a PEO. If that's the case, the terms of their multiple employer plan may affect your client's options. Check out Rev. Proc. 2002-21 & 2003-86 and cross your fingers they have a multiple employer plan if they are indeed a PEO.

If it's truly a leasing situation, has your client considered the leased employee safe harbor - 10% money purchase plan with immediate participation/vesting - which eliminates the much of mess for your client since the 4 employees wouldn't have to be counted on the practice's nondiscrimination testing.