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Leased Employees and Self-Employed Medical Reimbursement Plans
(Posted May 25, 2001)
Question 105: Leased employees are not required to be treated as regular employees for purposes of a self-insured medical expense reimbursement plan. With regard to counting service hours in a "lease to own" situation, does that mean that service as a leased employee is not counted towards eligibility in a self-insured medical expense reimbursement plan, once the leased employee becomes a common-law employee?
Answer: You are correct.
This question brings up an excellent point. Let me give a little background so I can put the explanation into context. The leased employee rules apply to many types of welfare benefits including:
|Group term life insurance under IRC §79. |
Accident and health plans under IRC §106.
Qualified tuition reduction programs under §117(d).
Group legal service plans under IRC §120.
Cafeteria plans under IRC §125.
Educational assistance programs under IRC §127.
Dependent care assistance programs under IRC §129.
Miscellaneous fringe benefits under IRC §132.
Employee achievement awards under IRC §274(j).
VEBAs under IRC §505.
COBRA continuation requirements under IRC §4980B.
Large group health plans under IRC §5000.
However, self-insured medical reimbursement plans are not on the list. These plans are governed by IRC 105(h), which has its own set of nondiscrimination requirements. Under section 105(h), employees can be excluded if they have less than 3 years of service, so counting service properly is an important issue.
By definition, a leased employee is someone who, first and foremost, is not a common law employee of the person for whom they are providing services. If such worker under a leasing arrangement (whether or not that worker has satisfied the substantially full-time requirement of the leased employee rules) later starts to work as a common law employee of the recipient, that employer must credit the worker with all hours of service under the leasing arrangement. (See IRC 414(n)(4)(B).) This is true not only for qualified retirement plans, but also for the welfare benefit plans listed above which are subject to the leased employee rules.
So, for example, suppose I am the common law employee of Astaire Temporary Services. I work for 5 months at Ralph Recipient's office. Ralph decides he likes me and hires me as a regular employee. I never achieved the status of leased employee because I never was there on a substantially full-time basis for at least one year. Nonetheless, because of IRC 414(n)(4)(B), Ralph must count those 5 months, not only for purposes of his retirement plans, but also for his IRC 125 cafeteria plan.
With that background, let's consider a self-insured medical reimbursement plan under IRC 105(h). Using the example above, Ralph would not need to count my 5 months with the temp service in determining my elegibility for the 105(h) plan. Why? I wasn't his employee, and nothing in the Code requires him to count my work when he did not have sufficient control over me to have me treated as his common law employee. Because section 414(n) doesn't apply to that plan, section 414(n)(4)(B) does not apply to require him to consider those hours.
As with a retirement plan, great caution must be taken to make sure that the worker truly was not a common law employee of the recipient. If so, the hours would need to be counted just as they would for any other common law employee. There are numerous Q&As in this column dealing with this issue.
These issues are discussed in more detail in Chapter 4 of my book, Who's the Employer?.
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
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