Subscribe Now!
Free Daily News, Jobs, Webcasts, Discussions
Post and Distribute
Your Jobs
ARPA Webcasts

Featured Jobs

DB Retirement Plan Administrator

The Nolan Company
(Telecommute / Overland Park KS)

The Nolan Company logo

DB/DC Administrator

Primark Benefits
(Telecommute / Burlingame CA)

Primark Benefits logo

Retirement Plan Administrator

Bates & Company
(Telecommute / Winter Park FL)

Bates & Company logo

Employee Benefits/Health and Welfare Attorney

Miller Johnson
(Telecommute / Grand Rapids MI / Kalamazoo MI / Detroit MI)

Miller Johnson logo

Director of Finance

NYCDC of Carpenters Benefit Funds
(New York NY)

401(k) Consultant

TPS Group
(Telecommute / North Haven CT)

TPS Group logo

Director of 401(k) Implementation, Core

Human Interest
(Telecommute / Mill Valley CA)

Human Interest logo

401(k) Implementation Manager

Human Interest
(Telecommute / San Francisco CA)

Human Interest logo

Retirement Plan Administrator (Account Manager)

Kushner & Company
(Telecommute / Portage MI)

Kushner & Company logo

Plan Document Specialist

Jocelyn Pension Consulting
(Telecommute / Boulder CO / San Rafael CA)

Jocelyn Pension Consulting logo

DC Retirement Plan Administrator

The Nolan Company
(Telecommute / Overland Park KS)

The Nolan Company logo

Retirement Plan Consultant / Relationship Manager

Associated Pension Consultants
(Chico CA / Sacramento CA)

Associated Pension Consultants logo

Retirement Plan Administrator

My Benefits, LLC
(Telecommute / Daphne AL / Atlantic Beach FL)

My Benefits, LLC logo

Product Support Consultant part of Wolters Kluwer Legal & Regulatory
(Telecommute) part of Wolters Kluwer Legal & Regulatory logo

Retirement Plan Administrator

RSW & Associates
(CT / NJ / NY)

RSW & Associates logo

DC or DB Administrator

Farmer & Betts, Inc.
(Telecommute / Tacoma WA / Tualatin OR / Littleton CO)

Farmer & Betts, Inc. logo

Free Newsletters

“BenefitsLink continues to be the most valuable resource we have at the firm.”

-- An attorney subscriber

Mobile App image LinkedIn icon
Twitter icon
Facebook icon

BenefitsLink > Q&A Columns >

Who's the Employer?

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

Avoiding the Substantially Full-Time Rule for Leased Employees

(Posted May 17, 2001)

Question 99: My company leases most of its employees from a staffing firm. We're uncertain whether they are common law employees of us, or leased employees. Can we assume they're leased employees and still cover them under our plan?

Answer: You are correct in noting that common law employees of the recipient cannot be leased employees. If they are your company’s common law employees (which is a reasonably safe bet), then you must treat them as you would any other common law employee (in the absence of plan provisions to the contrary).

If they are not common law employees, then they probably have most of the attributes of leased employees. They are provided to you under an agreement with the staffing firm, and you give them their primary direction and control (although not enough control to make them common law employees). There is just one other rule that stands in the way of their being treated as leased employees.

Under IRC 414(n), a leased employee must provide services to the recipient on a substantially full-time basis for at least a year. IRS Notice 84-11 defines substantially full-time as meaning 1,500 hours (or 3/4 of the time that your common law employees in that job work, if less). Any 12-month period can be used to satisfy the substantially full-time requirement. You don't have to limit it to plan years or eligibility computation periods. Hours as a direct employee are added together with hours worked under the leasing arrangement.

Until a worker satisfies the substantially full-time standard, the worker is not a leased employee. That means the worker is not deemed to be an employee of your company, because it is the status of leased employee that causes them to be treated as an employee. If the worker is neither an employee nor deemed to be an employee, then it is a violation of the exclusive benefit rule of IRC 401 to cover the worker under your plan.

Fortunately, IRS Notice 84-11, on which we can rely unless and until the IRS finalizes leased employee regulations (and none are even proposed at the moment), provides an easy way out. A plan is given the option of covering people even though they have not met the substantially full-time standard. (See Q&A 9.) Effectively, this allows you to waive the requirement. However, such a waiver would need to be in the plan document. Most prototype documents do not include a clause, so you would likely need to amend to an individually designed plan to accomplish this.

Having done so, you can still limit coverage by the standard "one year of service" eligibility requirement. You would not need to worry about whether the worker is a common law employee of your company. As soon as a worker satisfies the year of service requirement, he or she would enter the plan, even if the more stringent substantially full-time standard had not yet been satisfied.

For an in-depth discussion of the leased employee rules, including considerations of whether a worker is a common law employee of the recipient and the application of the substantially full-time standard, see 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.

Copyright 1999-2017 S. Derrin Watson
Related links:

(restricted access)

(restricted access)

© 2021, Inc.