Who's the Employer?

Answer: As more and more companies realize that there are real questions about whether staffing firms employ those on their payroll, they also realize the difficulty of having those firms cover their workers under their qualified plans.

Staffing firms are subject to the exclusive benefit rule (as are all other employers), which provides that qualified plans must only benefit employees of the sponsor (and their beneficiaries). If the staffing firm isn't the employer, then it can't sponsor a plan on its own.

To address that problem, many staffing firms are "co-sponsoring" plans with their clients. Internal Revenue Code section 413(c)(2) says that if two employers cosponsor a plan, each is considered the employer of all the employees covered. Thus, the exclusive benefit rule is taken care of.

Section 413(c)(1) says that section 410(a)'s eligibility requirements are applied as if the two businesses were a single employer. Therefore, one counts all hours of service, without worrying about whether they are performed for the staffing form or the client. Section 413(c)(3) imposes a similar rule for determining vesting.

So far, it looks like co-sponsoring plans avoids thorny questions about who is the real employer. But there's more to this story.

The real question about these plans isn't section 410(a). The real question is sections 410(b) and 401(a)(4). In other words, how is nondiscrimination testing performed for a cosponsored plan? And the answer is, there is nothing that joins the two businesses for nondiscrimination testing. So each company must apply nondiscrimination tests separately.

This means that, unless one is dealing with a nonintegrated money purchase plan covering almost everyone, it's necessary to determine whether the staffing firm, its client or both is truly the employer. If the client is the common-law employer (as is most often the case), then testing is done at its level. If the staffing firm is the employer, then testing is done at its level. Particularly for a 401(k) plan, this can have a profound effect on the result.

A thorough discussion of these issues appears in Chapter 4 of the new second edition of my book, Who's the Employer?.

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