3803. What special rules apply to leased employees for purposes of the qualification requirements?Nuco Employeercline202014-08-17T15:09:00Z2014-08-17T15:09:00Z38744988Summit Business Media4111585114Site Map/Retirement Plans/Pension And Profit Sharing/Qualification/Employees and Employers 2005-01-25T00:00:00ZTaxFactsDefaultArticle116370356-00-tf1.xml358.00;#2248;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1What special rules apply to “leased employees” for purposes of the qualification requirements?67600.0000000000TaxFactsDefaultArticle2010-01-14T23:32:42ZSBMEDIA\moss-admin3803. What special rules apply to leased employees for purposes of the qualification requirements?For the IRC’s qualification requirements, an employer generally treats any individual who is a leased employee as though that individual were the employer’s own employee. To the extent that contributions or benefits provided for a leased employee by the organization from which the employee is leased are attributable to services performed for the employer, these contributions or benefits are treated as if they were provided by the employer under a qualified plan.IRC Sec. 414(n)(1). These two requirements have the effect of requiring most leased employees who have met a recipient plan’s eligibility provisions to be included in the recipient’s plan as an employee of the recipient. A leased employee is an individual who is not an employee of the recipient employer and who performs services for a recipient employer, if the individual’s services are provided to the recipient under one or more agreements with a leasing organization, the individual has performed services for the recipient or related employer on a substantially full-time basis for a period of at least one year, and the services are performed under the primary direction or control by the recipient employer.IRC Sec. 414(n)(2). For purposes of this definition, the term employee means a common law employee as determined under the twenty factor test set forth in Nationwide Mutual Ins. Co. v. Darden,503 U.S. 318 (1992). which must be applied before it can be determined whether an individual meets the definition of a “leased employee.”Burrey v. Pacific Gas and Elect. Co., 1998 U.S. App. Lexis 26594 (9th Cir. 1998); General Explanation of Tax Legislation Enacted in the 104th Congress (JCT-12-96), p. 173 (the 1996 Blue Book).The fact that an individual is a leased employee does not automatically mean he or she must be a participant in a plan maintained by the employer. A plan may exclude a leased employee from participation in the plan when the plan can satisfy coverage and nondiscrimination testing by including the leased employee with no benefits or the benefits provided by the leasing company plan. At least two circuit courts have held that ERISA does not per se require the inclusion of leased employees in an employer’s plan.See Abraham v. Exxon Corp., 85 F.3d 1126 (5th Cir. 1996); Bronk v. Mountain States Tel. & Tel., Inc., 21 EBC 2862 (10th Cir. 1998), aff’d, 2000 U.S. App. LEXIS 14677 (10th Cir. 2000). In addition, the IRS addressed this issue in Notice 84-11,1984-2 CB 469, A-14. stating that leased employees should be treated as employees, but the plan’s failure to include them as participants in the plan does not result in disqualification of the plan. Despite its issuance prior to TRA ’86, Notice 84-11 was cited favorably in Bronk v. Mountain States Tel. & Tel., Inc.,21 EBC 2862 (10th Cir. 1998). as controlling authority on this issue.The determination of whether services are performed under the primary direction or control of the recipient is based on the facts and circumstances. A finding will be made if the service recipient exercises the majority of direction and control over the individual; for example, whether the individual is required to comply with the recipient’s instructions as to when, where, and how the services are to be performed; whether the services will be performed by a particular person; whether the individual is subject to the recipient’s supervision; and whether the services must be performed in a particular order or sequence set by the recipient. The recipient may be a single employer or a group consisting of employers required to be aggregated under the controlled group, common control, or affiliated service group rules (Q 3807, Q 3809).IRC Sec. 414(n)(6)(B). Employers are related if a loss on a sale of property between them would be disallowed as a deduction under IRC Sections 267 or 707(b) or they are members of the same controlled group of corporations, using a 50 percent rather than 80 percent ownership test.IRC Secs. 414(n)(6)(A), 414(a)(3).Safe HarborEven though an individual is a leased employee, he or she may be disregarded by the employer for purposes of determining qualification if the individual is covered by a qualified money purchase pension plan maintained by the leasing organization and:(1)the plan provides for employer contributions by the leasing organization at a non-integrated rate which is not less than 10 percent;(2)the plan provides for immediate participation on the first day an individual becomes an employee of the leasing organization unless (x) the individual’s compensation from the leasing organization in each plan year during the four year period ending with the plan year is less than $1,000, or (y) the individual performs substantially all of his or her services for the leasing organization;(3)the plan provides for full and immediate vesting of all contributions under the plan; and(4)leased employees do not constitute more than 20 percent of the recipient’s non-highly compensated work force.IRC Sec. 414(n)(5).This safe harbor applies only for purposes of the leased employee provision; it does not permit an employer to disregard a common law employee who otherwise meets the definition of a leased employee.IRC Sec. 414(n)(2). See Burnetta v. Comm., 68 TC 387 (1977), acq. 1978-2 C.B. 1.A recipient’s non-highly compensated work force is the aggregate number of individuals who are not highly compensated (Q 3804) but who are common law employees of the recipient and have performed services for the recipient on a substantially full-time period of at least one year or who are leased employees with respect to the recipient.IRC Sec. 414(n)(5)(C)(ii).A money purchase pension plan of a leasing organization is not qualified if it covers any individuals who are leased by the leasing organization to the recipient but who are not themselves employees of the leasing organization. That is because the plan would not meet the “exclusive benefit” rule (Q 3737).See Professional & Executive Leasing, Inc. v. Comm., 89 TC 225 (1987), aff’d, 862 F.2d 751 (9th Cir. 1988).