Who's the Employer?

Answer: Most likely, no. In almost all probability, John is still the common law employer of these workers. Accordingly, they are not his leased employees and they should be treated as he would anyone he employed directly. He can ignore whatever benefits the staffing firm is providing (assuming he is not cosponsoring the plan), because Internal Revenue Code section 414(n) does not apply to his situation.

In the unlikely event that he has ceased to be the common law employer and the staffing firm is the common law employer, then it becomes a little more tricky. In that case, these workers would be his leased employees (assuming they had ever worked at least 1,500 hours per year for him). As such, he would be deeemed (for purposes of Code sections 415 and 404) to have provided them with any benefits provided by the staffing firm's plan. Thus, he would need to take those benefits into account in determining his own plan and deduction limitations.

The leased employee rules and the issues surrounding common law employer determination are discussed in more detail in Chapter 4 of my book, Who's the Employer?.

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