Associate Attorney - Tax (Honolulu HI)
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Question 42: ABC, Inc. "leases" all of its employees, from the president on down, from XYZ Staffing. ABC sponsors a profit sharing plan ("PS Plan") for all non-union workers employed at ABC (though these individuals are on XYZ Staffing's payroll). ABC has contributed 15% of pay for the last 3 years into the PS Plan. XYZ Staffing sponsors a single 401(k) plan ("401(k) Plan") that covers all of its employees who are "leased" to its clients (the "recipients" of the leasing services). Some of ABC's employees participate in and contribute to XYZ Staffing's 401(k) Plan. XYZ Staffing also contributes to a union-sponsored retirement plan on behalf of XYZ Staffing's workers who are part of a collective bargaining unit.
It seems to me that, absent the PEO arrangment, the total PS Plan and 401(k) Plan contributions made on behalf of employees working at ABC would violate IRC 404 deduction limit. One or both organizations seem to be taking deductions for contributions that exceed 15% of the wages earned by workers at ABC.
To complicate matters, the client is firing the staffing organization and hiring a new one. Are all (soon to be ex-)employees of XYZ Staffing able to take a distribution from the XYZ Staffing 401(k) Plan or do the same-desk/successor employer rules apply?
Answer: You have put your finger on several important problems with this arrangement. The first problem is summarized nicely by the quotation marks you put around "leases."
If it is XYZ Staffing, then both firms can cover the workers and they are true leased employees. If it is ABC, and XYZ Staffing is litle more than a glorified payroll service, then XYZ Staffing cannot cover the workers XYZ treats them as true common law employees.
Given the facts that (1) all the rank and file is leased; (2) even the president is leased, who surely isn't taking direction from XYZ Staffing; and (3) ABC has the power to move all the employees to a new firm, it certainly appears that ABC is the employer.
If XYZ Staffing is the employer, then:
Which of those sets of choices do you like best? (Can you say "None of the above"?)
These issues are discussed in more detail in Chapter 4 of my book, Who's the Employer?.
Incidentally, yes, the same desk rule would clearly apply here, in a very literal fashion.
As a side note, there may be some help on the horizon. HR 3490, introduced two months ago in Congress, would clarify the relationships between PEOs (staffing organizations, or "professional employer organizations") and their clients, and answer many of the problems PEO relationships pose. It is too early to say whether that law would pass or what its final shape will be, but it's encouraging to see efforts to resolve this thorny set of issues.
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.
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