Leased Employees- Partial Plan Termination

[Coleboy1]

We have a plan with about 1000 active employees. About 300 were moved to a leasing corporation in 2025. The plan excludes leased employees. Would this be considered a partial plan termination?

 

[bp parv]

Coleboy1: There is much to unpack from your fact pattern. 

I am assuming that the 300 service providers were common law employees of the client and also participating in the retirement plan. I further assume that the new leasing arrangement is a PEO type arrangement where the leasing agency becoming the employer of record (handling payroll, etc...) while the client still retains discretion over how and when these 300 individuals perform their services. I also assume the 300 individuals will not be covered under its current retirement plan. 

To answer your question: The "moving" of the 300 participants deserves a very hard look to determine if a partial plan termination has been triggered. As you know, the determination of a partial plan termination is based on facts and circumstances. Case law, of course, is one very important factor and so is the prevailing view of the IRS. I assume this issue matters because the plan has a vesting schedule.

But your partial plan termination issue is just the tip of the iceberg. If these 300 individuals are not covered under the client's plan, will they be covered under the PEO's plan? Are the terms of the PEO plan similar to the client's plan?

Remember that no matter what you may label these 300 service providers, they would likely still be "common law employees" of the client and still may lay claim to be covered under the client's plan (as opposed to the PEO plan). 

The plan's exclusion is for "leased employees", which is a very specific definition under 414(n). Look at that definition. Would these 300 be excluded under that definition right now?  And assuming they can be excluded for 410(a) purposes, they would still be included for 410(b) coverage purposes unless there was an exclusion there (e.g., age 21/year of service, union, etc...)

 

 

 

 

 

[Paul I]

@bp parv raises several points to consider.

Here some related points to keep in mind:

• The determination of whether a partial plan termination occurred is based on facts and circumstances.  This determination is relatively easy when the relationship with the employees is severed completely.  Otherwise, the determination can be challenging.  Consider visiting IRS Notice 84-11 and Revenue Ruling 2007-43 for starters.
• Most agreements with leasing companies repeatedly emphasize that the leased employees are not common law employees of the client company, and many even position the leased employees as independent contractors of the leasing company.  Unfortunately, these representations often fall apart in operation.
• Part of the determination of the status of a leased employee considers who decides which leased employees are assigned to work at the client company.  Commonly, this is the leasing company with the client company reserving the privilege to reject some of the assignments but without complete authority to determine all assignments.  This gets dicey when a group of employees gets spun off to a leasing company when individuals who have been working together for years get split up.
• If the employees who are spun off to the leasing company work essentially 75% of a full time equivalent employee at the client company, then the client company's retirement plans will need to include the leased employees in the plans' compliance tests.  This is by regulation which supersedes any plan provision that excludes leased employees.  There are more details about how these rules operate in 414(n) regulations.

There is much more to think through beyond whether there was a partial plan termination.