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Who's the Employer?

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

Breaks in Service for 414(n)(4)(B) Service

(Posted December 28, 2001)

Question 136: This is a followup to Q&A 135. Because we must count an employee's prior service with a temp agency (even if the person never becomes a leased employee), do we need to apply the usual break in service rules? For example, if Sally works for 3 months through a temp agency for Employer A, then works for 3 months for Employer B, and then later gets hired full-time for Employer A, do we need to count the first 3 months that she worked through the temp agency if there was no break in service? As a 401(k) plan TPA, this is a big issue for us because it affects the annual employee information we request from employers. If a person goes directly from a temp agency job to a full-time job, that can be fairly easy to track. But if the employer also needs to figure out if a break in service has occurred for some people, that could create some major headaches.

Answer: Bring out the aspirin.

IRC 414(n)(4)(B) says that when someone becomes an employee or a leased employee, their prior service under a leasing arrangement must be counted. No more, no less. It becomes hours of service just like the hours of service of a W-2 employee -- no more, no less. As hours of service, it is subject to all the rules of IRC 410 on what hours may be counted and what hours may be disregarded, including the break in service rules.

There are a couple of alternatives to getting migraines over this:

1. This is a document provision. You don't have to implement the break in service rule. The Code merely allows you to do so. Especially in a 401(k) situation, is it really worth the bother? If it is worthwhile in general, how about adding a clause that counts all IRC 414(n)(4)(B) service without regard to the break in service rules?

2. Simply inform your clients that they should never, never, never rehire anyone. This includes temps who have left for a while before coming on to the payroll. The penalty for breaking the rule is $X/hour for you to straighten out the mess that it causes. At least then they can pay for the Excedrin.

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.