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Answers are provided by S. Derrin Watson, JD, APM
401(k) Plans Using Professional Employer Organizations-- Miscellaneous Questions
(Posted December 1, 2000)
Question 64: How are deferrals accomplished when a leased employee is included in a 401(k) plan of the recipient? Is the compensation paid by the leasing organization (PEO) considered to be compensation paid by the recipient for purposes of the recipient's 401(k) plan? Is the deferral withheld by the PEO and then a check mailed to the recipient's plan?
Is it permissible for each client of a PEO to have a 401(k) plan that only covers its own leased employees if an attorney has determined that the employees of each client are employees of each recipient under 414(n) when each leased employee has worked for the applicable client on a substantially full-time basis for at least a year? Is it acceptable for each recipient to be the sole sponsor of the plan (no dual sponsorship)?
Answer: Handling a 401(k) in a leased employee situation can be tricky, as these questions show. Here are my thoughts:
- Let's start with my favorite question: Who's the Employer? (Sounds like a great name for a book!) It is either the staffing firm (PEO), their client (the recipient), or both of them. Remember that virtually every court decision has found that the client is the common law employer.
- If the staffing firm is the common law employer and the client isn't, then the workers become leased employees (assuming they are under the client's primary direction and control) once they have served the client on a substantially full time basis for at least a year.
- If the client is the employer and the PEO isn't, then the PEO is simply running a bookkeeping service for the client, and is writing payroll checks on its behalf.
- If both are the employer, it gets messier. See Q&A 59.
- If either the client is the employer or the PEO is somehow the true common law employer, then, yes, the PEO deducts the deferral and sends a check to the client.
- If the worker is a leased employee, 414(n) says that compensation paid by the leasing organization is deemed to be paid by the recipient. If the worker is a common law employee of the recipient, then the PEO is deemed to be paying the salary on the recipient's behalf.
- Can the client maintain a plan on its own? Of course. Most likely, these folks are its employees. If not, then they are its leased employees, and hence deemed to be its employees for several requirements of the Code, include section 410, section 401(a)(4) and the exclusive benefit rule. There is no reason the client needs to bring in the staffing firm as a cosponsor. (On the other hand, there are very good reasons for the staffing firm to bring its client in as a cosponsor of its plan.)
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.)
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