who is paying the employees?

Small S-corp has come to me looking to install a plan.  Husband and wife and two kids are the only employees.  Simple, right?  They mention that Western Employee Services is the EIN on their W-2s and also handles all their other benefits.

This isn't a problem, is it?  I'm not entirely sure what to ask who next.  Kind of sounds like a PEO situation, but that should still allow Small S-corp to have their own plan with no ties to the larger population, I think.

Thanks.

If the plan's sponsor would use an IRS-preapproved document, what might it provide about recognizing leased employees as participants?

Some selected sections of the basic plan document... I bolded the part that I think makes this work.
 

Quote

"Employee": A person who is currently or hereafter employed by the Employer, or by any other employer aggregated under Code sections 414(b), (c), (m), (n), or (o) and the regulations thereunder, including a Leased Employee subject to Code section 414(n) and a self-employed owner of an unincorporated employer

Quote

In the case of an individuals who are not contemporaneously classified as Employees of the Employer for purposes of the Employer's payroll system (including, without limitation, individuals employed by temporary help firms, technical help firms, staffing firms, employee leasing firms, professional employer organizations,
or other staffing firms whether or not deemed to be "common law" Employees or Leased Employees) are not considered to be Eligible Employees of the Employer and will not be eligible to participate in the Plan. The preceding sentence will not apply in the case of the Employer out-sourcing its human resource functions for Employees that the Employer would otherwise treat as "common law' Employees. In the event any such individuals are reclassified as Employees for any purpose (including without limitation, common law or statutory employees, by any action of any third party, including, without limitation, any government agency, or as a result of any private lawsuit, action, or administrative proceeding) such individuals shall, notwithstanding such reclassification, remain ineligible for participation hereunder. Notwithstanding foregoing, the exclusive means for individuals who are not contemporaneously classified as an Employee of the Employer on the Employer's payroll system to become eligible to participate in this Plan is through an amendment to this Plan, duly executed by the Employer, that specifically renders such individuals eligible for participation hereunder.

This Plan is to be construed to exclude all individuals who are not considered Employees for purposes of the Employer's payroll system, and the Plan Administrator is authorized to do so, despite the fact that its decision may result in the inadvertent loss of the Plan's tax qualification requiring an amendment of the Plan's eligibility provisions.

PEOs and Leasing Companies go out of their way to incorporate language in the agreement with an employer to structure it so individuals employed by the PEO or Leasing Company are not considered under 414(n) as employees of the contracting company.

As we all have seen, what is on paper is not always consistent with what happens in practice. One common problem occurs when a leased employee works more than either 1500 hours or 75% of the hours than a company employee would work doing the same job.  When this happens, the leased employee at least is included in compliance testing even if the plan says they are excluded from participation.  Worst case is the leased employee is treated as a company employee and eligible for the plan.

This is just an example of the type of issue that could be a problem for the company and is not the complete picture.  For example, there is a safe harbor where the leasing company provides a 10% money purchase plan for the leasing company's employees, although I have never seen one.

In addition to the universal advice to read the plan document, also read the leasing agreement and educate the client on what needs to be monitored to inadvertently triggering a need to consider the leased employees in any aspect of the plan.

The ERISA Outline Book is the best resource I have seen discussing this topic in depth.