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Preventing Plan disqualification - ESOP 20% Leased Employee Limitation


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Group:

In reviewing a client's ESOP Plan docs adopted 2013 the employer excludes leased employees from participating. However, then I read the payroll and employee census and see a leasing company was the employer of record and issued W2's in the leasing Co name. 

At the time of adoption there were approximately 22 employees including 2 HCE. 

IRS has begun to audit the plan and we have already received IDR's asking about the leased employees. 

My research thus far is as follows:

Under TEFRA 1982 Tax Equity and Fiscal Responsibility Act (TEFRA) Public Law 97-248 to curb certain abuses, the 1982 TEFRA act promulgated a law that leased employees are not subject to the same pension rules if the leased employee is covered by a plan maintained by the leasing organization that allows for immediate participation, full and immediate vesting, and employer contributions of at least 7.5 percent of the employee's salary.

In other words, Leased employee are subject to employer/plan sponsor pension rules if lease Co doesn't allow immediate participation , full and immediate vesting and employer contributions at least 7.5% employees salaries. 

Then under TRA of 1986 public law 99-514 seemed to modify the 1982 law by adding the following:

Additionally, IRC§414(n)(5)(A) states that the safe harbor provisions do not apply if leased employees constitute more than 20 percent of the recipient's nonhighly compensated workforce.

Q: To prevent the plan from being disqualified is there any argument that the leased employees are under control and direction of plan sponsor and the leasing company doesn't provide a money pension plan with immediate vesting and participation? (I may be getting the rules confused)

The '86 law seemed to remove the safe harbor and no other work around to prevent disqualification. 

Q: Would the result change if instead of leasing company there was a PEO? 

Any cases or other treatise to review for my research would be greatly appreciated. 

Thank you 

 

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FWIW, I note that in the Erisa Outline Book, there is a comment that "apparently" - since IRC 414(n) does not cross-reference IRC 409(I), the IRS is apparently of the view that leased employees may not participate in an ESOP maintained by the recipient organization. It then refers to Q&A-26 of the American Bar Association's Q&A session with the IRS on May 7, 2004, which is available at the ABA website.

Don't know if this helps at all...

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