Crediting Service When Hiring From Temp Agency

The employer occasionally uses the services of a temporary agency to find new talent. Occasionally after 90 days the "temp" is offered a permanent position with the employer. Does the employer have to count service while a "temp" for the Plan's eligibility waiting period, vesting credits and accruals? In other words, does the employer have to bridge that service while working "temp" now that they are hired to a permanent position with the employer?

Thank you

The first step is to look at whether the temps are common law employees of the employer.  That determination is independent of the leased employee rules and being leased doesn't automatically mean you are not a common law employee. See Notice 84-11, Q&A 3.  If they are common law employees of the employer, yes, the service counts.

If the temp really is a common law employee of the leasing company and not of the employer, we had a recent spirited discussion on the topic, including some cites.  I read the code as saying all of the service counts when the temp becomes an employee of the employer.  If anyone still holds the opposite opinion, I'm sure they will join the discussion.

https://benefitslink.com/boards/index.php?/topic/63341-temp-worker-initial-eligibility/&tab=comments#comment-287501

Kevin is correct.  Read section 414(n) (it's short).  Section 414(n)(4)(B) provides the rule: 

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). 

It references the requirements in section 414(n)(2):  

(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.

Thus, you have to count the temp service (for purposes of all of the requirements listed in 414(n)(3)) if 1) the temp is eventually an "employee", 2) the temp services were provided pursuant to an agreement between the eventual employer and the temp agency, and 3) the temp was performing services under "primary direction or control" by the eventual employer. 

I second the warning that none of this analysis is necessary if the temp was already a common law employee of the eventual employer while the temp was performing the temp services. 

Summary:  you have to count service while a temp for eligibility and vesting (but not any annual allocation conditions on employer contributions.

Congratulations, there are roughly a dozen people in the whole country who know this.  You are now part of an exclusive club!

[I'm sure I'm exaggerating, but that's just more fund!].

In the same vein, we have a new client who wants to establish a 401k plan and has paid some of his 'employees' using 1099 and not w-2s.  Some have been on their books for 3-4 years.  The client is asking if this prior service can count toward service for plan purposes.  They intend to pay them w-2 wages for 2019.

1 hour ago, austin3515 said:

(but not any annual allocation conditions on employer contributions.

Can you provide a cite?

1 hour ago, cpc0506 said:

In the same vein, we have a new client who wants to establish a 401k plan and has paid some of his 'employees' using 1099 and not w-2s.  Some have been on their books for 3-4 years.  The client is asking if this prior service can count toward service for plan purposes.  They intend to pay them w-2 wages for 2019.

Are we assuming that the determination that those 1099 folks were not employees was made correctly?

If they were truly independent contractors, their service was as self-employed individuals rather than as employees of the plan sponsor. If they were actually employees but were paid on 1099s, well, there's a different problem to solve.

What about the subparagraph 414(n)(2) (B): ?

(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

The OP suggests there's (maybe) a three-month feeling-out period.

Keep reading Chip, you're almost there.  The OP situation is not a leased employee and you stopped at the definition of leased employee.  Pay particular attention to 414(n)(4)(B) when you get there.

55 minutes ago, Kevin C said:

Keep reading Chip, you're almost there.  The OP situation is not a leased employee and you stopped at the definition of leased employee.  Pay particular attention to 414(n)(4)(B) when you get there.

Hello Kevin -

I read thru the "spirited discussion" you linked above.  Has Larry ever gotten back to you or anyone after he finished his side-bar discussion with Derrin and his intended further investigation of Derrin's citations?  I ask bc at this point, given Sal says its is grey matter, and the various points made by you and Larry, now Derrin, it seems one side suggests the safe bet is to credit the service (even where temp was temp less than 1 year before being hired), the other strongly believes it is incorrect to credit the service (where temp was tem less than 1 year before being hired)... what's a girl to do?!

1 hour ago, cheersmate said:

Hello Kevin -

I read thru the "spirited discussion" you linked above.  Has Larry ever gotten back to you or anyone after he finished his side-bar discussion with Derrin and his intended further investigation of Derrin's citations?  I ask bc at this point, given Sal says its is grey matter, and the various points made by you and Larry, now Derrin, it seems one side suggests the safe bet is to credit the service (even where temp was temp less than 1 year before being hired), the other strongly believes it is incorrect to credit the service (where temp was tem less than 1 year before being hired)... what's a girl to do?!

Everyone (Larry and Sal) at least agreed that crediting the service was a safe option, by my reading.  

13 minutes ago, AKowalski said:

Everyone (Larry and Sal) at least agreed that crediting the service was a safe option, by my reading.  

I do not believe Larry agreed  ... yet 

I'm not expecting the discussion in the other thread to continue. 

Like Sal says, the plan fiduciary needs to make a reasonable and prudent determination.  I'm not seeing any grey in 414(n)(4)(B).  If you feel  otherwise, I would recommend documenting why you reached that decision in case it comes up later. 

On 12/13/2018 at 8:30 AM, cpc0506 said:

In the same vein, we have a new client who wants to establish a 401k plan and has paid some of his 'employees' using 1099 and not w-2s.  Some have been on their books for 3-4 years.  The client is asking if this prior service can count toward service for plan purposes.  They intend to pay them w-2 wages for 2019.

Duckthing nailed this one by the way. 

There is no such thing as an employee paid using 1099s.  if they were employees they are required to use a W-2 to report their wages.  If they were independent contractors they are required to use a 1099 to report the income.

If they were employees the service can count.  If they weren't it can't count. 

My guess the "original sin" is they were employees not treated as employees but that is just a guess. 

I would modify that slightly.  If they really were independent contractors, their service as an independent contractor won't count unless the plan is amended to specifically credit that service.  A pre-approved document should have the option of crediting service with an unrelated predecessor employer. 

Yes, but who would the predecessor employer be?  The employee who reports the 1099 income?

2 hours ago, cpc0506 said:

Yes, but who would the predecessor employer be?  The employee who reports the 1099 income?

If they really were independent contractors, what business entity did they use when they filed their taxes?  I would expect sole proprietorships, but you won't know unless you ask.  Our VS document uses this definition: "Predecessor Employer. An employer that previously employed the Employees of the Employer. "

But, I agree with the others that your description sounds like they were employees. I was merely pointing out that if they really were independent contractors, is it possible to credit prior service.