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Answers are provided by S. Derrin Watson
Existing plan with new staffing firm
(Posted February 26, 1999)
Question 5: When a employer with a 401(k) plan enters into a leasing arrangement with a staffing organization that also has a 401(k), should the employer amend his plan to merge his plan's assets and liabilities to the staffing organization's plan, or should the employer substitute the staffing organization's plan for his own, or should the employer continue his plan separate from the staffing organization's plan?
Answer: First, take a look at Q&A 4 for my analysis of why the staffing organization is probably not the common law employer. That being the case, the recipient is way out on a limb if the recipient relies on the staffing organization's plan to meet discrimination tests of his own plan.
An approach becoming more common in these situations is to cosponsor the staffing organization's plan. That way, the workers are clearly the employees of someone who is sponsoring the plan. However, this still leaves the plan vulnerable to disqualification unless (A) it only covers the employees of that one recipient, or (B) all participating recipients are cosponsors.
In many respects, I think it is simpler to admit at the outset that the recipient is the employer, opt out of the staffing organization's plan, and leave the employees in the recipient's plan.
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