As noted in Part I and Part II of this series, benefits compliance concerns typically take a backseat to the many good reasons for healthcare organizations to provide or receive the services of leased employees. However, with sufficient awareness, these compliance issues, which often have surprisingly outsized risks, can generally be managed without disrupting the aims of the employee leasing arrangement. In Part I, we reviewed the potential impact of employee leasing laws on employee leasing arrangements. In Part II, we discussed when a group health plan providing coverage to leased employees may be considered a “MEWA” and why this can be a problem. In this final Part III, we will address “leased employee” status under the Internal Revenue Code and how this can impact a retirement plan offered by the lessee in an employee leasing arrangement.
“Leased Employee” Status for Retirement Plans — Lessee Beware
In certain circumstances, leased employees may have to be treated as employees of the lessee (in addition to the lessor) for retirement plan purposes. Under Section 414(n) of the Internal Revenue Code, an employer who receives services from a “leased employee” must treat the employee as its own common law employees under its retirement plans. For instance, leased employees are treated as employees of the lessee for purposes of satisfying minimum coverage and nondiscrimination requirements applicable to the lessee’s retirement plans.
Practice Pointer: Lessees should consider categorically excluding leased employees from participation, subject to compliance with minimum coverage and nondiscrimination requirements. In the event individuals should have been treated as leased employees when they were not, this helps avoid costly operational failures, such as a failure to permit deferral contributions.
A leased employee is a person who provides services to the lessee (1) pursuant to an agreement between the lessee and another person, (2) on a substantially full-time basis for a period of at least one year, and (3) under the primary direction or control by the lessee.
Often, the most difficult factor to determine is whether the employee is under the primary direction and control of the lessee. In regard to healthcare organizations, a committee report accompanying the legislation enacting this leased employee concept stated that certain professionals, such as doctors, “who regularly make use of their own judgement and discretion on matters of importance in the performance of their services and are guided by professional, legal, or industry standards” are not considered leased employees because they will necessarily fail this factor. The same report goes on to state that “secretaries and nurses in a doctor’s office” generally are subject to the primary direction and control of the lessee and would therefore likely be leased employees if the other factors are met.
A healthcare organization’s failure to properly characterize individuals providing services as leased employees can have significant consequences and may jeopardize a retirement plan’s tax-qualified status if left uncorrected. To correct such a failure and preserve the qualification of the plan, the organization may be required to provide retroactive benefits with interest to the leased employees to make up for missed opportunities to defer and missed employer contributions and/or to correct minimum coverage and nondiscrimination failures.
Practice Pointer: Carefully track the hours, compensation, and duties of individuals who are providing services through a leasing arrangement, particularly those providing services for a year or longer. If these individuals must be treated as leased employees, ensure the recordkeeper of the retirement plan is accounting for them in minimum coverage and nondiscrimination testing and ensure they are permitted to timely participate in the plan, if not excluded.
If you have any questions about benefits compliance in employee leasing, please contact one of the attorneys in the Employee Benefits and Executive Compensation Practice Group at Bradley.