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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Owner as Leased Employee

(Posted December 19, 2000)

Question 68: A limited liability company (LLC) in Arizona is treated as sole proprietor for tax purposes, all his employees (about 40) including himself are leased employees through a leasing company (a "PEO"). Most of the employees including the owner participate in the leasing company-sponsored 401(k) plan. Can the owner set up and participate in his own separate qualified plan, becuase he has profits to him through the LLC?

Answer:

Let's start with the notion that the owner almost undoubtedly is not an employee of the leasing company. That was established back in the '80s, under the Professional and Executive Leasing court case. To say that the leasing company is supervising and directing and controlling their client is utter nonsense.
Unless his LLC is co-sponsoring the leasing company's plan, therefore, that plan almost undoubtedly violates the exclusive benefit rule and is not qualified.
Where the owner is "leased," that lends credence to the notion that the leasing company is no more than a bookkeeping service and has no genuine employment relationship with anyone, including the staff.
Case after case has found that the staff are common law employees of the recipient, not the staffing firm.
Can the LLC set up a qualified plan for its employees? Of course it can! And who are its employees? The owner and all the people working there. You can exclude some of them if you can still satisfy IRC 410(b) after the exclusion.
Can you take into account the contributions provided in the 401(k) set up by the PEO? That depends. If the LLC co-sponsors the plan, then yes you can. If not, and the workers are common law employees of the LLC (and they likely are) then there is nothing which allows you to offset the benefits provided by the LLC's disqualified plan.

These issues are discussed in detail in Chapter 4 of my book, Who's the Employer?.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.