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Answers are provided by S. Derrin Watson, JD, APM
Employee on someone else's payroll
(Posted April 19, 1999)
Question 24: Employer A and Employer B are not part of the same controlled group or affiliated service group. However, Employer B's management employees are paid through Employer A's payroll and are covered under Employer B's retirement plan. These expenses are then charged back to Employer B. Employer B's remaining employees are paid through its own payroll and covered under its own retirement plan.
Do you agree that: (1) Employer B's management employees must be covered under its own retirement plan unless the plan specifically excludes them or allows them to waive participation; (2) Employer A's plan may have a compliance problem by covering employees of an unrelated employer (assuming the plan is silent in this regard); and (3) the existence of a common payroll is not determinative of who is the "employer."
Answer: Let's take question (3) first. Who writes the paycheck does not determine, for qualified plan purposes, who is the employer. If it did, staffing firms would be breathing a lot easier! Instead, employer/employee status is determined by reference to the various control tests outline in Rev Proc 87-21, various court decisions, and the IRS audit guidelines. For more specifics on the tests involved, see Chapter 2 of my book Who's the Employer?
So, given that, it would indeed make sense that these individuals would be the common law employees of B, not A, although you have to examine all the facts and circumstances to be sure. If B is the employer then:
(1) Absent plan language to the contrary, these management employees are entitled to all the benefits other B employees are entitled to receive. In other words, with a standard definition of employee, they are entitled to participate in the plan. Moreover, even if there is language excluding them from the plan, since they are employees, they are counted with all other employees of B in determining whether the plan complies with the Code.
(2) Regardless of plan language, A cannot cover them under its plan unless B is a cosponsor of the plan. If they are covered under A's plan without their real employer as a sponsor, then the exclusive benefit rule has been violated.
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