Does your Company utilize the services of Leased Employees? If so, it is important to be aware of the rules governing qualified retirement plans and leased employees. There are certain requirements that must be met in order for an individual to be considered a leased employee. They are:
- The individual is not a common-law employee of the employer.
- The individual provides services under an agreement between a leasing organization and the employer.
- The services are provided on a substantially full-time basis for at least one year.
- The services are of a type historically performed in the employer’s business by common-law employees.
The IRS provides a limited safe harbor that permits a recipient employer to exclude leased employees from plan coverage if:
- Leased employees do not constitute more than 20 percent of the recipient employer’s non-highly compensated employee workforce, and
- The leasing organization maintains a non-integrated money purchase plan that makes a contribution of at least 10 percent of compensation for the leased employees.
- Such a plan must provide the leased employees with immediate eligibility and full vesting upon plan entry.
Employers can consider adding a plan provision that excludes leased employees from participating. This strategy is viable only if the plan can pass coverage testing that includes the leased employees as eligible employees who are excluded from benefiting under the plan.
Whether your plan document excludes leased employees or not, it is important to alert your third party administrator if you are utilizing leased employees. They can help you work through the particulars of dealing with this issue. An ounce of prevention is worth more than a pound of cure!