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Who's the Employer?

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

Rev. Proc. 2002-21 and Employee Status

(Posted May 29, 2002)

Question 188: A temp agency has about 200 internal staff employees and several thousand temps nationwide, most of whom work more 1,000 hours per year. These temps are true temps and are most likely common law employees of the staffing firm. The agency wants to set up a 401(k) plan for the internal staff, but they do not want to cover the temps. Rev. Proc. 2002-21 seems to imply that the temps are not employees of the agency. If so, can the agency's plan cover only the internal staff (which has all of the HCEs), exclude the temps, and still pass the minimum coverage test of Code section 410(b)?

Answer: You're reading too much into the Rev. Proc.

Rev. Proc. 2002-21 does not say that worksite employees are not common law employees of the PEO. It very, very carefully avoids saying that. The exact definition from the Rev. Proc. is: "The term "Worksite Employees" means employees who receive amounts from a PEO for providing services to a CO pursuant to a service agreement between the PEO and the CO." It says absolutely nothing about who actually is the common law employer of those workers.

In a sense, that is the genius of the Rev. Proc., in that it neatly skirts the issue. That is also one of the flaws of the Rev. Proc., because it gives no guidance on dealing with the issue. And we will have to deal with it as we administer multiple employer plans. Determining whether the PEO or the CO is the common law employer is a crucial element in properly administering such a plan.

What the Rev. Proc. does say is that if the worksite employees are not common law employees of the PEO, and the PEO covers them, then there is an exclusive benefit rule problem which can be solved by complying with the Rev. Proc. It also says that if a single employer PEO plan covers worksite employees after 2003 (regardless of who is the common law employer of those workers), then the PEO cannot rely on a determination letter.

You are correct that true temporary employees are likely the common law employees of the PEO. (For more on this, see Chapter 4 of my book, Who's the Employer.) Unfortunately, as you say, they are classified as worksite employees. Accordingly, as it now stands, Rev. Proc. 2002-21 makes it impractical for a temp agency to set up a plan covering its temps, because their clients will not wish to cosponsor the plan and the PEO will not want to risk nonreliance.

Since writing the foregoing, I have come to the conclusion that the IRS will not likely treat true temps as Worksite Employees. Click here for my analysis.

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.