3929 / What special rules apply to leased employees for purposes of the requirements that apply to qualified plans?

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.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 (1) the individual’s services are provided to the recipient under one or more agreements with a leasing organization, (2) 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 (3) the services are performed under the primary direction or control of the recipient employer.² For purposes of this definition, the term employee means a common law employee as determined under the generally applicable standard for determining worker classification (see Q 8723).3

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.4 In addition, the IRS addressed this issue in Notice 84-11,5 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.,6 as controlling authority on this issue.