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Confused about what exactly a “leased employee” is? Turns out a lot of people the IRS contacted were, too.
The IRS’ Employee Plans Compliance Unit (EPCU) recently completed its study on the role of leased employees in retirement plans.
When EPCU asked plan sponsors who used pension feature code “3F” on their Forms 5500 — the code that indicates that they received the services of leased employees. Approximately 65 percent of the sponsors reported that they did not have leased employees. Instead, these sponsors said they:
- didn’t correctly understand the definition of “leased employee” under Code Section 414(n);
- or incorrectly chose code “3F,” having meant to choose “3E” or because the “3F” feature code used to indicate something else on previous Forms 5500.
The study’s original aim was to determine if leased employees were being properly considered for plan purposes. According to EPCU, if leased employees aren’t properly considered, consequences can include the leased employees being improperly excluded from the plan, preferential treatment going to highly compensated employees or incorrect testing and limitations for the plan.
However, with those results in hand, EPCU took pains to ensure that plan sponsors understand the proper definition of“leased employee,” in four key requirements:
- Agreement. An agreement between the recipient company and the leasing organization must be struck detailing the services of the leased employee.
- Service. A leased employee must be full-time, or nearly so. EPCU states that a leased employee must work at least 1,500 hours during a 12-month period (though that number can dip as low as 1,125 hours in the event a regular employee in the same position would work the same amount in a year). Service by the leased employee to a related company to the recipient company or as a common law employee to the recipient company can be counted toward this 1,500-hour threshold.
- Direction or Control. The recipient company should have primary direction on the leased employee in his or her job duties, regardless of whether it has the right to fire the leased employee or if the leased employee works for other companies.
- Common Law Employer. The leasing company must be the common law employer of the leased employee.