401k plan sponsors who contract with third party employers and have temporary or “leased” employees on staff should be aware of these individuals’ potential impact on their retirement plan.
Temporary employees aren’t reported on the payroll, and they’re not eligible to participate in the plan, so what’s the big deal? Sponsors may still need to consider leased employees when determining whether the plan complies with minimum participation and coverage requirements under the tax code.
According to a recent blog post from benefits law experts Spencer Fane LLP, a firm with 17 offices throughout the southern U.S., sponsors must be mindful of employees who may be classified one of a few different ways.
If a leased employee is characterized as a common law employee — basically, an employer has the right to tell that person what to do, how, when and where to do the job under IRS guidelines — and they would meet the plan’s age and service requirements, sponsors must consider that individual for coverage and participation testing.
Leased employees who are common law employees of the third party leasing agency — not the plan sponsor — and who’ve provided a year or more of full-time service to the sponsor must still be accounted for in participation and coverage testing. On rare occasions, these individuals may be covered under the leasing agency’s retirement plan, and won’t be considered leased employees to the sponsor.
Sometimes, leased employees are treated as co-employees. In other words, they are considered employees of both the sponsor and staffing company. As such, they are generally eligible for benefits offered by the sponsoring employer. In this instance, the retirement plan may be maintained by the employer or a professional employer organization (PEO) that handles payroll and other administrative and benefits functions. These employees are accounted for in plan testing.
Special situations also apply to entities called “controlled groups,” i.e., subsidiaries or non-U.S. companies. In those cases, sponsors should be aware of their employees’ citizenry and resident status, and account for them accordingly in plan participation and coverage testing.
When dealing with leased employees in all situations, it’s important for sponsors to review employment contracts closely, as well as monitor employee relationships and their impact on the retirement plan to ensure they remain in compliance with applicable tax laws. It also may be prudent to consult with an expert, such as a benefits or employment attorney, who can explain relevant guidelines and help sponsors understand how to properly classify employees for plan testing purposes.
