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Answers are provided by S. Derrin Watson
Top Heavy Rules for Plan Covering Leased Executives
(Posted February 16, 2001)
Question 82: Company R decides to put all of its employees, including the owner-president of the company, on the payroll of a staffing firm. It previously sponsored a top heavy plan, which was terminated. The staffing firm has a plan that is not top heavy. Can Company R's employees become a part of the staffing firm's plan without providing top heavy minimum contributions?
Answer: Let's start with the notion that it is 99.5% likely that as a matter of law the owner of the company legally is not an "employee" of the staffing firm. The Professional and Executive Leasing case from the '80s makes that abundantly clear.
That, of course, leads to question whether any of the other workers at R legally are employees of the staffing firm, of R, or of both. Case after case has found that such workers are employees of R despite the source of their paychecks. Is the staffing firm controlling what they do? Is the staffing firm determining their rate of pay? Is the staffing firm hiring and firing? Does the staffing firm supply them with any training? I'll bet the answer to those questions is no, so the staffing firm is not the true employer.
If the staffing firm covers R's president, the staffing firm's plan loses its tax-qualified status, due to the plan's failure to satisfy the "exclusive benefit rule" -- it would be covering an individual who is not an employee of the staffing company as a matter of law. Disqualification on that ground is avoided if R becomes a co-sponsor of the plan. The same problem arises with respect to the other workers.
So top heavy minimum contributions are the least of your worries.
(These issues are discussed in more detail in Chapter 4 of my book, Who's the Employer?.)
Assuming R becomes a co-sponsor of the plan, there still remains the question of who is the employer of the workers. If R is the employer, then IRC 416 is applied at R's level, and you are right back with a top heavy plan, at least as to R.
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