temp worker, initial eligibility

Sponsor of large plan uses a temp agency to "test drive" potential employees for 3-6 months.  After the trial period a worker may be hired to become a regular employee of the plan sponsor.  We have advised the sponsor that the time while the worker was working through the temp agency must be counted toward eligibility for plan participation.  Does anyone have a citation or code section that supports that position?

Thanks.

This might help.

https://benefitslink.com/cgi-bin/qa.cgi?db=qa_who_is_employer&n=20

On 11/2/2018 at 3:41 PM, M Norton said:

Sponsor of large plan uses a temp agency to "test drive" potential employees for 3-6 months.  After the trial period a worker may be hired to become a regular employee of the plan sponsor.  We have advised the sponsor that the time while the worker was working through the temp agency must be counted toward eligibility for plan participation.  Does anyone have a citation or code section that supports that position?

Thanks.

I would suggest the link given to you by the ESOP guy is not applicable.  I would also suggest that your interpretation of having to count the time with the temp agency is also wrong.  And when I say "I suggest", I'm not really suggesting! :-)

The link ESOP Guy provided is dealing with someone who becomes a leased employee; your guys never do.  We have used "temp to hire" several times over the years.  If we eventually find someone we like, after the required time on the temp agency (which is just a couple of months as I remember) we can hire them on our own payroll without paying a fee.  Their date of hire on our payroll is their date of hire for all of our benefits, including beginning counting for the retirement plan year or service.  So..... you won't find the cite you are asking for because that interpretation is incorrect.  Sorry!

The cite is

Quote

 

414(n)(4)(B) Years of service

In the case of a person who is an employee of the recipient (whether by reason of this subsection or otherwise), for purposes of the requirements listed in paragraph (3), years of service for the recipient shall be determined by taking into account any period for which such employee would have been a leased employee but for the requirements of paragraph (2)(B).

 

The requirements listed in paragraph (3) include sections 410 and 411.  Paragraph (2)(B) has the requirement of substantially full time service for at least a year.

Slightly different wording on the IRS website in Publication 7003 which is used to help determine if a plan document meets the requirement of Section 414(n):

https://www.irs.gov/pub/irs-pdf/p7003.pdf

From page 3:

Quote

Line c. All service as an employee (whether by reason of being a leased employee or otherwise) must be credited. Credited service must  also include any period of service during which the employee would have been a leased employee but for the requirement that substantially full-time services be performed for at least one year. Sec. 414(n)(4)

Sorry but the plan should NOT include any service while the person was an employee of the temp. agency.  

If the person received his/her paychecks and W-2s from the temp agency, then he/she was an employee of the agency, not the place where he/she worked.  Absolutely no debate about that.  Service should only count once he/she became an employee of the company. 

It gets murkier if the person is paid as a temp/consultant/contractor by the actual employer but this one is very straightforward.   

I don't think that is quite right.  I believe that once the person goes on the payroll of the company, his service as a temp does count.  See Kevin's answer above.

48 minutes ago, Pension Dork said:

Sorry but the plan should NOT include any service while the person was an employee of the temp. agency.  

If the person received his/her paychecks and W-2s from the temp agency, then he/she was an employee of the agency, not the place where he/she worked.  Absolutely no debate about that.  Service should only count once he/she became an employee of the company. 

It gets murkier if the person is paid as a temp/consultant/contractor by the actual employer but this one is very straightforward.   

 

Actually, this is a complex set of rules but once the person becomes a "leased employee" the service can count.

I stand by the link I gave as it starts with this:

Once a temporary employee meets the criteria for becoming a leased employee (one year of service on a substantially full-time basis), must s/he be included in coverage testing for a subsequent year in which s/he works less than 1,000 hours (our Plan's definition of a Year of Service)? Section 414(n)(4) seems vague.

I guess I could have been a little more clear that the person asking the original question needs to decide if this is a temp employee or leased employee.  But what I was going for was the idea you include service for leased employees.

Leased Employee is defined in:

Quote

 

414(n)(2) Leased employee

For purposes of paragraph (1), the term "leased employee" means any person who is not an employee of the recipient and who provides services to the recipient if—

(A) such services are provided pursuant to an agreement between the recipient and any other person (in this subsection referred to as the "leasing organization"),

(B) such person has performed such services for the recipient (or for the recipient and related persons) on a substantially full-time basis for a period of at least 1 year, and

(C) such services are performed under primary direction or control by the recipient.

 

I would consider a "test drive" of a potential employee from a temp agency to satisfy (a) and (c) of the definition.  This person will never become a leased employee because of the 1 year requirement in (b).  However, if this person becomes an employee, 414(n)(4)(B) quoted above says the service with the temp agency counts.  If this person never becomes an employee or leased employee, the service doesn't count.

As an aside, someone who satisfies (A), (B) and (C) above is treated as a leased employee of the recipient under 414(n) and would also get all of their service counted.  Similar result, but not the situation here. 

1 hour ago, Jim Chad said:

I don't think that is quite right.  I believe that once the person goes on the payroll of the company, his service as a temp does count.  See Kevin's answer above.

Kevin's answer is wrong.  See my explanation to his comment.

3 hours ago, Kevin C said:

The cite is

The requirements listed in paragraph (3) include sections 410 and 411.  Paragraph (2)(B) has the requirement of substantially full time service for at least a year.

Slightly different wording on the IRS website in Publication 7003 which is used to help determine if a plan document meets the requirement of Section 414(n):

https://www.irs.gov/pub/irs-pdf/p7003.pdf

From page 3:

  Quote

Line c. All service as an employee (whether by reason of being a leased employee or otherwise) must be credited. Credited service must  also include any period of service during which the employee would have been a leased employee but for the requirement that substantially full-time services be performed for at least one year. Sec. 414(n)(4)

Here's the problem.  A misinterpretation of what is said with regard to 414 (n)(4).  Counting the service when not a leased employee is applicable IF the individual meets the requirements otherwise of being a leased employee which still requires a full year. In other words, you don't get out of counting him as a leased employee by having him on the employer's payroll for six months AND THEN on the leasing company for six months and claiming he doesn't have the year with the leasing company. That first six months counts in that case..

Now, back to our question: the employee is, from the beginning, on the temp company's payroll for a few months and THEN is hired by the employer (plan sponsor).  Does his temp time count for the employer's plan: ABSOLUTELY NOT.  414(n)(4) is simply not applicable.  Is anyone still saying something else?  

Larry,  where does it say 414(n)(4)(B) only applies for leased employees?  It specifically says it applies to someone who is an employee of the recipient (whether by reason of this subsection or otherwise).  Note the "or otherwise". 

As for your example of working for the company before going to the temp agency, Notice 84-11, Q&A 8 includes the sentence "In addition, any period of service performed by the employee as a common law employee of the recipient is taken into account for purposes of determining whether the employee has performed services on a substantially full-time basis for a period of at least one year." So, the person in your example meets all the requirements for a leased employee and the "or otherwise" doesn't apply.

Take a look at 414(n)(4)(A) which says that the whole leasing issue shall only apply AFTER the close  of the one year period discussed in (2)(B). So, you don't get to (n)(4)(B) until after the one year period has elapsed, as I said in that prior post. He has to have the full year before we get into the issue.  Our guy who worked a few months for the temp company does not ever meet that condition and therefore we never get to applying any of the leased employee rules.  

I reviewed Derrin's book for justification and, I think, I have found contradictory statements (of course knowing Derrin, he will explain me how it is not conflicting).  I have sent him a detailed email asking for his take on this and the conflict I see in two of his Q&As.   I will report back.  

And FWIW, Sal says the guidance on this issue isn't clear, and you have to make a reasonable determination. His 2018 EOB is in our conference room, and I'm too lazy to go get it, but the 2017 version has an example of this - see pages 1a.442 and 443.

(4)(A) says it applies "In the case of any leased employee ..."  (4)(B) says it applies "In the case of a person who is an employee of the recipient (whether by reason of this subsection or otherwise) ..."  I think it is a really tortured reading of (4)(B) to say it only applies to leased employees.

What's the worst case for a plan that requires a year of service for eligibility if the IRS decides we are wrong?  In my case, service would be counted that could have been excluded.  In your case, people would be improperly excluded from the plan and the plan would be treated as imposing a service requirement that exceeds 1 year of service under 1.410(a)-3(e)(1).

11 hours ago, Belgarath said:

And FWIW, Sal says the guidance on this issue isn't clear, and you have to make a reasonable determination. His 2018 EOB is in our conference room, and I'm too lazy to go get it, but the 2017 version has an example of this - see pages 1a.442 and 443.

Belgrath, can you give the exact cite; the online version does not have page numbers.  I will post what Sal says.  BTW, I am in the midst of a "discussion" with Derrin as to the interpretation.  So far, we are disagreeing but I need to research his comments further, and will do so.

Hi Larry - let's see, it is Chapter 1A, Part B.5.a.1 and a.2

5 hours ago, Belgarath said:

Hi Larry - let's see, it is Chapter 1A, Part B.5.a.1 and a.2

OK; here it is:

5. Leased employee who becomes a common law employee of the recipient. In 4. above, we discuss the consequences of a common law employee becoming a leased employee. What if the change is in reverse, where a leased employee later is hired by the recipient as a common law employee. In that case, the employer will treat the “new” employee like any other employee for all purposes under the qualified plan rules, not just those listed in IRC §414(n)(3). Also, the employee’s service as a leased employee iscounted by the employer where service is a relevant consideration. See Notice 84-11, Q&A-8.

While we are waiting for the dust to settle, I'll add a new element to the discussion.  We have all been assuming that the temporary workers under discussion are not common law employees of the recipient. While that may be the case, it is something that needs to be considered before you get to the leased employee rules.  I wouldn't be surprised if a "test drive" of a potential employee included sufficient control to be considered a common law employee of the recipient.   Being leased doesn't automatically mean you are not a common law employee. 

Quote

 

Notice 84-11

Q-3. How do the provisions of section 414(n) relate to the "common law employee" rules?

A-3. The provisions of section 414(n) operate independently of the "common law employee" rules. Thus, if an individual is considered an employee of the recipient under the common law rules, such individual is an employee of the recipient for all purposes and without regard to the provisions of section 414(n). For example, an individual who is a common law employee of an organization (a "recipient") will continue to be an employee of the recipient even though the recipient formally "leases" the individual from a separate entity that maintains a safe harbor plan described in section 414(n)(5). In such cases, the fact that the "leasing" organization maintains a safe harbor plan does not affect the treatment of the individual as a common law employee of the recipient.

 

On ‎11‎/‎7‎/‎2018 at 2:12 PM, Larry Starr said:

OK; here it is:

5. Leased employee who becomes a common law employee of the recipient. In 4. above, we discuss the consequences of a common law employee becoming a leased employee. What if the change is in reverse, where a leased employee later is hired by the recipient as a common law employee. In that case, the employer will treat the “new” employee like any other employee for all purposes under the qualified plan rules, not just those listed in IRC §414(n)(3). Also, the employee’s service as a leased employee iscounted by the employer where service is a relevant consideration. See Notice 84-11, Q&A-8. 

 

5.a. Participation in the plan. How the change to common law employee status affects plan participation depends on how the recipient’s plan deals with leased employees for eligibility purposes. If leased employees are excluded by classification, then the individual’s hiring as a common law employee will be treated like any other employment classification. If the classification as a leased employee was the only reason why the individual was not eligible, and the individual has satisfied all other eligibility requirements, the individual will become a participant immediately upon his or her being hired as a common law employee. Refer to Chapter 2 (Section IV, Part F) for more details on the entry date rules for employees who are previously excluded under a job classification. If the employee still must satisfy other eligibility conditions (e.g., the employee did not satisfy the year of service requirement as a leased employee), then those conditions would have to be satisfied first before the common law employee becomes a participant. If the plan does not exclude leased employees by classification, then, if the employee had met the plan’s eligibility conditions while a leased employee, the employee’s participation in the plan would continue uninterrupted after he or she becomes a common law employee of the recipient employer. 

 

5.a.1) What if employee did not meet the one-year “substantially full-time” service requirement before becoming a common law employee.? Suppose at the time the individual becomes a common law employee of the recipient he or she has not performed services for the recipient as a leased employee on a substantially full-time basis for at least one year. In that case, the recipient was not required to treat the leased employee as an employee for the qualification requirements listed in IRC §414(n)(3) before the individual became a common law employee. Should that prior service be counted toward establishing eligibility for the recipient’s plan? This is not clear. If the individual’s brief service as a leased employee was on a substantially full-time basis, so that the individual would have been treated as a leased employee under IRC §414(n) had that service continued for a full year, then it would seem to be more reasonable to take that service into consideration, so as not to artificially delay participation in the plan. On the other hand, if, on an annual basis, the leased employee would not have met the substantially full-time test, then there is a stronger argument to disregard the period of service as a leased employee and treat the individual as a new employee as of the date they commence employment as a common law employee. We emphasize, however, that no clear guidance has been issued on this issue, and the plan fiduciary will have to make a reasonable and prudence determination of how the applicable circumstances affect the application of the plan's eligibility requirements.

 

5.a.2) Example. Xavier commences services with Corporation W on April 1, as a leased employee. Xavier performs services on a substantially full-time basis so that, if he performed such services for a 12-month period, he would be treated as a leased employee under IRC §414(n). On September 1, W hires Xavier as a common law employee, and Xavier is terminated as an employee of the leasing organization. Corporation W’s plan requires one year of service for eligibility purposes. Although not clear under §414(n), a reasonable interpretation of §414(n) is to treat Xavier’s “employment commencement date” for eligibility service purposes as April 1, not September 1. Thus, if Xavier completes at least 1,000 hours of service during the 12-month period measured from April 1 to the following March 31 (including hours credited for the five months as a leased employee), he would have credit for a year of service for eligibility purposes under W’s plan as of such date. 

So, Sal notes that it is not clear whether to go back to the earlier hire date; to quote: 

"We emphasize, however, that no clear guidance has been issued on this issue, and the plan fiduciary will have to make a reasonable and prudence determination of how the applicable circumstances affect the application of the plan's eligibility requirements."

In an off line discussion with Derrin, he is convinced that the correct position is to give credit to the earlier date.  He has given me some arguments for this and I will be studying it and parsing his explanation to see if it changes my mind.  More to come.....

Larry, did you change your mind?  What arguments were raised? 

On re-reading this thread, I don't see how this question could be unclear in light of section 414(n)(4)(B).  By its terms, section 414(n)(4)(B) applies to someone who is an "employee" at some point in time, and who at some other point in time would have been a 414(n) leased employee but for failing the 1-year requirement. 

Section 414(n)(4)

(A) In general

In the case of any leased employee, paragraph (1) shall apply only for purposes of determining whether the requirements listed in paragraph (3) are met for periods after the close of the period referred to in paragraph (2)(B).

(B) Years of service

In the case of a person who is an employee of the recipient (whether by reason of this subsection or otherwise), for purposes of the requirements listed in paragraph (3), years of service for the recipient shall be determined by taking into account any period for which such employee would have been a leased employee but for the requirements of paragraph (2)(B).

Section 414(n)(4)(A) operates on paragraph (1) -- which gives the rule that a 414(n) leased employee is treated as an employee of the service recipient -- and paragraph (1) operates with respect to the list of requirements in paragraph (3).  By contrast, section 414(n)(4)(B) operates directly with respect to the list of requirements in paragraph (3).  

What is the legal effect of section 414(n)(4)(B) if it doesn't squarely address the question at issue?