In 1982, Congress introduced the concept of leased employees, persons that work for one employer (the “leasing organization”), but are actually performing services for someone else (the “recipient”). For many retirement plan and other employee benefit purposes, these workers are treated as though they were employed by the company for which they are performing services, the recipient.
Since the enactment of the leased employee rules in IRC §414(n), leasing organizations, sometimes called “staffing firms” or “professional employer organizations” (PEO), have become commonplace. These firms carry some or all members of a recipient company’s workforce on their payroll, and handle all the withholding, paperwork, and similar employee administration for their clients, freeing the recipient from many human resources burdens. Their value is shown in their popularity — with over 12 million workers on their collective payrolls — and their rapid growth. [BL 153.]
Although the leased employee rules have been with us for many years, there are many elements of these rules that are generally not understood by practitioners. Perhaps the thorniest issue in this regard is whether the leasing organization or the recipient is the true employer of the employee. That issue gave rise to Rev. Proc. 2002-21, which affects PEOs sponsoring single employer plans. The employee status question and the Rev. Proc. itself will both be discussed in detail in this chapter.
 | Q 4:1 Where do we find the rules relating to leased employees? |
| Q 4:2 What is a PEO? |
| Q 4:3 What is a leasing organization? |
| Q 4:4 What is a Client Organization or CO? |
| Q 4:5 What is a recipient? |
| Q 4:6 Is there a difference between a recipient and a CO? |
| Q 4:7 What is a Worksite Employee? |
| Q 4:8 What is a leased employee? |
| Q 4:9 What is the difference between a leased employee and a Worksite Employee? |
| Q 4:10 Can an independent contractor be both a leased employee and a leasing organization? |
| Q 4:11 Must a leased employee be a common law employee of the leasing organization? |
| Q 4:12 Can someone who is a common law employee of a recipient be a leased employee of the same recipient? |
| Q 4:13 How can I tell if the leasing organization or the recipient is the true common law employer? |
| Q 4:14 Are there any legislative proposals to address the issue of who employs workers under a leasing arrangement? |
| Q 4:15 Should a PEO firm be prepared to pay the wages of those on their payroll, whether or not the firm is paid by the recipient? |
| Q 4:16 Have there been any IRS rulings that a leasing organization is the true employer? |
| Q 4:17 Have there been any court cases on whether the leasing organization is the true employer? |
| Q 4:18 What are the consequences of the worker being a common law employee of the leasing organization? |
| Q 4:19 What are the consequences of the worker being a common law employee of the recipient? |
| Q 4:20 Is it possible that a worker is a common law employee of both the recipient and the leasing organization? |
| Q 4:21 If the contract between the PEO and the CO says they are co-employers, does that make them dual employers? |
| Q 4:22 Does it matter if state law provides that the PEO is a co-employer? |
| Q 4:23 Can you summarize the consequences of different entities being the employer? |
| Q 4:24 How did the Small Business Job Protection Act of 1996 (SBJPA) affect common law employee status? |
| Q 4:25 What constitutes working on a substantially full-time basis for the recipient? |
| Q 4:26 What hours count for purposes of the substantially full-time basis determination? |
| Q 4:27 Do hours spent performing services for businesses other than the plan sponsor count for purposes of meeting the substantially full-time requirement? |
| Q 4:28 What is the computation period for determining whether services are performed substantially full-time? |
| Q 4:29 Can a plan treat a worker as a leased employee even if the worker has not met the substantially full-time requirement? |
| Q 4:30 What determines if the employee is working under the primary direction and control of the recipient? |
| Q 4:31 What are the pension consequences of being a leased employee? |
| Q 4:32 How is compensation of the leased employee determined? |
| Q 4:33 How does the recipient treat contributions and benefits the leasing organization provides the recipient? |
| Q 4:34 Can a recipient’s plan offset contributions made to the leasing organization’s plan to determine if IRC §401(a)(4) is satisfied? |
| Q 4:35 How does IRC §414(q), relating to highly compensated employees, relate to the leased employee rules? |
| Q 4:36 How are hours of service for eligibility and vesting credited for leased employees? |
| Q 4:37 Must the recipient cover a leased employee under the recipient’s plan? |
| Q 4:38 Does a worker ever lose the status of leased employee? |
| Q 4:39 What is the safe harbor exception? |
| Q 4:40 What does it mean that leased employees constitute no more than 20% of a recipient’s nonhighly compensated work force? |
| Q 4:41 What is a safe harbor plan? |
| Q 4:42 How do the leased employee rules apply to benefit plans other than retirement plans? |
| Q 4:43 How do the leased employee rules affect a “lease to own” situation? |
| Q 4:44 Can an employer obtain a ruling from the IRS regarding leased employee status? |
| Q 4:45 Can a PEO obtain a ruling from the IRS on whether its Worksite Employees are its common law employees? |
| Q 4:46 Can a company that leases employees file form 5500-EZ? |
| Q 4:47 What is Rev. Proc. 2002-21? |
| Q 4:48 What special terms does Rev. Proc. 2002-21 define? |
| Q 4:49 Why did the IRS issue Rev. Proc. 2002-21? |
| Q 4:50 What are the benefits of complying with Rev. Proc. 2002-21? |
| Q 4:51 What are the consequences of not complying with Rev. Proc. 2002-21? |
| Q 4:52 Can a PEO plan established after May 13, 2002 receive the relief available through Rev. Proc. 2002-21? |
| Q 4:53 Can a PEO defined benefit plan receive the relief available through Rev. Proc. 2002-21? |
| Q 4:54 How does a PEO comply with Rev. Proc. 2002-21? |
| Q 4:55 What information must be in the PEO’s notice? |
| Q 4:56 What options does a CO have in response to a PEO’s notice? |
| Q 4:57 Can a PEO limit or restrict a CO’s choices? |
| Q 4:58 What must a CO do to cosponsor a PEO multiple employer plan under Rev. Proc. 2002-21? |
| Q 4:59 What must a CO do to have the PEO transfer its Worksite Employee’s plan assets to a CO plan under Rev. Proc. 2002-21? |
| Q 4:60 What happens if a CO does not make a choice in response to a PEO’s notice? |
| Q 4:61 What happens if a CO does not timely comply with all the requirements for its choice in response to a PEO’s notice? |
| Q 4:62 How can notices be given under Rev. Proc. 2002-21? |
| Q 4:63 What does the PEO do with the Spinoff Retirement Plan? |
| Q 4:64 When must assets be transferred from the PEO plan to the Spinoff Retirement Plan? |
| Q 4:65 When must assets be transferred from the PEO plan to the plans of electing COs? |
| Q 4:66 If the PEO decides to terminate its plan and to comply with Rev. Proc. 2002-21, will there be any assets in the plan after the Compliance Date? |
| Q 4:67 What does it mean to distribute from the Spinoff Retirement Plan and the terminating PEO plan “as soon as administratively feasible”? |
| Q 4:68 Must distributions be made to participants even if the 401(k) distribution restrictions would be violated? |
| Q 4:69 Is the PEO required to seek determination letters regarding its terminated or converted plan and the Spinoff Retirement Plan? |
| Q 4:70 How is top heavy status determined in the first year after conversion to a multiple employer plan? |
| Q 4:71 Can plans under IRS audit use Rev. Proc. 2002-21? |
| Q 4:72 Can a PEO Retirement Plan use EPCRS to address qualification errors other than those discussed for which relief is afforded? |
| Q 4:73 Does Rev. Proc. 2002-21 alter the determination of employee status of Worksite Employees? |
| Q 4:74 Does Rev. Proc. 2002-21 affect the determination of leased employee status? |
| Q 4:75 Does Rev. Proc. 2002-21 provide relief for COs? |
| Q 4:76 Does Rev. Proc. 2002-21 affect employer welfare benefit plans established by a PEO? |