One employer handling another's payroll

[Bird]

Hi, I'm hoping to get feedback for this non-paying business topic, although it is definitely benefits-related.

I'm the treasurer for a small non-profit.  We had one employee for many years, and she was paid under the payroll system of another non-profit - you could say there is a casual/friendly relationship between our organizations but no way is there any common control or commonality of any kind.  We reimburse the other employer for all wages, taxes, etc.  (I'll come back to "etc." later...)  This all set up way before my time, BTW.

Is this arrangement legit at all?  I was thinking it was ok for the other organization to be a common paymaster and process payroll as a convenience, but as I'm looking at more closely it seems there needs to be some common control or close relationship between employers, which does not exist here.

Back to the "etc." part - she's been participating in certain benefits of the other employer - LTD, life, and a 403(b).  Health was even offered but declined way back when.  I feel very strongly that she was NOT an employee of the other organization - they did nothing but cut her checks - and she should not have been covered under any of these benefit plans (weirdly enough, we are participants in a pension plan through yet another organization, legitimately, so she's been in a pension through one org. and a 403(b) through another).  

Unfortunately she died recently, and we are in the process of hiring a new person.  I want to make sure we do it right, and am advocating strongly to NOT have anything to do with having the new person paid through the second organization (although they remain perfectly happy to do it).  It's...downright fraudulent, IMO, and yet, I guess because "we've always done it," no one seems to grasp the severity of the situation.  

So - I'm looking for confirmation that I'm right, or if I'm not, say that so I can adjust my thinking.

[CuseFan]

Sometimes it seems like the wild wild west out there the way a lot of small non-profits (and churches in particular) operate, and trying to explain the rules and get them to do things the right way as opposed to the easy way and the way they've always done it can be a big up hill battle - and it's just a lack of understanding from volunteers who take the path of least resistance.

I don't think you are wrong. Administering payroll for someone else's employee(s) - not a problem, I guess, although who is listed as the employer (EIN, etc.) on the W-2? Considering that person as your employee for benefit purposes, especially retirement plan(s)? Big problem, as I see it, and would definitely dig in your heels to do it right (or have the other employer adopt as participating employer).

[jpod]

Bird, look at IRS Form 2678 and its instructions.  It may be that an arrangement of they type implemented by using this Form is in effect.

[leevena]

I am a benefits person, so I cannot comment on the payroll arrangement, and my concern would be with benefit eligibility.  If in fact the employee was not employed by the other organization, I highly doubt they were eligible for their benefit plans.  The issue is rarely raised by the benefit provider until their is a significant amount of money involved, such as a death payment or disability determination.

Good luck.

[Bird]

18 hours ago, jpod said:

Bird, look at IRS Form 2678 and its instructions.  It may be that an arrangement of they type implemented by using this Form is in effect.

Interesting/thanks.  It's definitely not a formal arrangement but good to know about this.

1 hour ago, leevena said:

The issue is rarely raised by the benefit provider until their is a significant amount of money involved, such as a death payment or disability determination.

That's my concern.  I'm going to prevail on this, simply by refusing to continue this arrangement, but no one seems to understand those implications.  The feedback I get is "the insurance company is happy to take the premiums."  (shaking head)

[jpod]

And I did not mean to imply that the 2678 payroll arrangement would cure the employee benefits coverage issue.  That is a seriously hot potato.

[Luke Bailey]

I agree with jpod. think the way the IRS would look at this would probably be as a straight-up payroll agent situation which would require adherence to those rules, including filing Form 2678. I also agree with him that a legitimized payroll agent relationship would not fix any employee benefit issues, since the payroll agent has no effect on the exclusive benefit rule.