Cost and flexibility are two reasons employers might be interested in hiring leased employees. Although they are not “common-law” employees of the organization for which they are performing services (the “recipient” employer), when certain conditions are met, the recipient employers must treat leased employees as their regular employees for qualified retirement plan coverage purposes.
Who is a Leased Employee?
There are a number of specific rules that must be met for an individual to be considered a leased employee. For example, the recipient employer must be paying for the individual’s services; the services must be pursuant to an agreement between the recipient employer and a leasing organization; and the individual must perform services on a substantially full-time basis for at least one year.
Substantially full-time basis means that within a 12-month period, the individual completes the lesser of:
- 1,500 hours of service, or
- 75 percent of the number of hours that are customarily performed by a regular employee in the same position. (If this method is used, an individual must be credited with at least 500 hours to be considered substantially full-time—even if 75 percent of the number of hours customarily performed would be fewer than 500.)
In addition, services must be performed under the primary direction or control of the recipient employer, and the individual must be a common-law employee of the leasing organization.
Qualified Retirement Plans and Leased Employees
Once the above definition has been satisfied, the recipient employer must treat the leased employee as a regular employee for qualified plan purposes and credit the leased employee for all service during the period the individual is a leased employee, including the qualifying one-year period. The leased employee will generally be provided with retirement plan benefits in the recipient employer’s plan, although sometimes there are arrangements whereby the recipient employer will pay the leasing employer an amount equal to the benefit provided under the leasing employer’s plan.
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.
Exclusion by Plan Provision
Some employers may hesitate to use leased employees because of potential administrative complexities regarding their retirement plan. However, there may be a solution: 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.