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Who's the Employer?

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

Handling "Leased" Employees on 5500 Forms

(Posted March 21, 2001)

Question 86: My client "leases" all his staff from a PEO. I know from your other Q&As that they would likely be regarded as his employees, but how do I report them on the Form 5500? Incidentally, the plan has a two year eligibility requirement; whether these workers are leased employees or common law employees, none of them would qualify this year. The only participants are the owner and his wife. The plan has $125,000 in assets.

Answer: You're in luck. It looks like you can file form 5500-EZ.

There are several conditions one has to meet to use 5500-EZ.

The plan can only cover the owner(s) and spouse(s).
The plan is able to pass 410(b) without being aggregated with another plan.
The plan isn't in a controlled group of corporations, a group of trades or businesses under common control, or an affiliated service group.
The plan doesn't cover a "business for which leased employees (as defined in Code section 414(n)(2)) perform services." (See the instructions to Form 5500 at page 3.)

Notice that the instructions specifically refer to the Code definition of leased employees, which excludes people who are common law employees of the recipient. Case after case has found that, in the standard PEO situation, the workers are common law employees of the recipient. (Yes, the PEO industry argues that the workers are simultaneously employees of the PEO as well -- but even if thats true, it doesn't change their status as common law employees of the recipient, at least according to the 9th Circuit Court of Appeals.)

So, if you are willing to admit they're actually common law employees of the recipient, then they cannot be leased employees as defined in the Code. As such, the plan can go ahead and file a 5500-EZ.

Remember, too, that a worker must perform services for a recipient on a substantially full-time basis (generally 1,500 hours per year) for 12 months before he or she becomes a "leased employee" within the meaning of the Code. Thus, a business can lease short-term replacement helpers from a temporary agency without the helpers being treated as leased employees unless and until they satisfy this substantially full-time requirement.

Just for fun, let's assume that the workers are truly leased employees (and not common law employees of your client). What does this do to your filing requirements?

You can't use the 5500-EZ, whether they are in the plan or not. If you use the services of a true 414(n) leased employee during the year, you must file form 5500.
You would list code 3F as a characteristic on line 8a of the 5500.
They are treated as employees of the client for all purposes of the form, including the participant counts on lines 6 and 7 (assuming they participate) and the ratio percentage test on Schedule T. (See page 53 of the instructions.)

Leased employee issues are discussed in more detail in Chapter 4 of my book, Who's the Employer?.

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.