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Hours of Service for Leased Employees
(Posted March 25, 1999)
Question 20: Once a temporary employee meets the criteria for becoming a leased employee (one year of service on a substantially full-time basis), must s/he be included in coverage testing for a subsequent year in which s/he works less than 1,000 hours (our Plan's definition of a Year of Service)? Section 414(n)(4) seems vague.
Answer: Q&A 12 of Notice 84-11 is substantially clearer:
Q-12. If, as of January 1, 1984, an individual is considered to be a leased employee, how are that individual's years of service determined for purposes of participation and vesting under the recipient's retirement plan?
A-12. For purposes of both participation and vesting, the entire period for which the leased employee has performed services for the recipient must be taken into account in accordance with section 414(n)(4), including periods before the effective date of section 414(n). Therefore, if the recipient is a calendar year taxpayer and the recipient's retirement plan requires one year of service before an employee may participate, and a leased employee began performing services for the recipient on January 1, 1981. However, because the individual does not become a leased employee until January 1, 1984, such leased employee need not begin to participate in the plan until January 1, 1984. Therefore, section 414(n) does not require the recipient to provide retroactive benefits for the leased employee for years of service prior to January 1, 1984.
The idea is that once you become a leased employee, you have the status of employee and are credited with all appropriate hours and years of service and compensation retroactively to when you started providing services.
Let's try a couple of examples.
John and Mary both work for Accountants Underworked, a temporary staffing firm. An accounting firm is shorthanded, and calls Accountants Underworked on January 2, 1997, asking for a couple of temps. John and Mary come in response to the call. Assume that Accountants Underworked is the true common law employer. The accounting firm has a calendar year profit sharing plan with a 1 year eligibility requirement, and January 1 and July 1 entry dates.
Mary is assigned a mammoth project that will take three years to complete, working full time. January 2, 1998, she achieves the status of leased employee, having performed 1500 hours of service in a 12 month period. That is also the anniversary of her employment commencement date, which is treated as the first date she performed services. She was credited with more than 1000 hours for that first year, and so has satisfied the eligibility requirement. She will enter the plan on the next entry date, July 1, 1998.
John has a project that, while ongoing, doesn't take as much time. He works 1200 hours during 1998 and 1999, and also does other short term work with Accountants Underworked. He stays on the same 100 hours/month schedule until May of 2000, when he jumps to 150 hours/month. Hence, during the period from December 1, 1999 through November 30, 2000, John provides 1500 hours of service to the accounting firm and becomes a leased employee. He is credited with 3 years of service for vesting purposes (1998, 1999, and 2000). He satisfied the year of service requirement in 1998. He will enter the plan January 1, 2001.
The consequences of being a leased employee are discussed at Q 4:25-32 of my book, Who's the Employer?.
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