Interesting question: A company (for this example, Company A)has 3 employees, but offers no benefits such as a 401(k) plan. However, Company A, to accomodate the employees,has an arrangement where the employees wages are paid by a totally unrelated company (Company b). There is no controlled group issue between A and B.

The Company A employees perform no services at all for B; the only reason they are carried on Company B's books is to be able to contribute to the Company B 401(k) plan. They receive their W-2's from Company B. Company B is reimbursed by Company A for the wages, taxes, etc.

Is this a proper set-up? I have never encountered this, so I was curious as to whether anyone else had heard of this situation. Thanks for any answers.

In the end, isn't Company B acting as a leasing organization for Company A? If so, I can't think of a reason why the individuals couldn't participate in Company B's plan.

That's what I initially thought, but there is no formal leasing agreement in place. Could it be made into one?

Sure, why not. Presumably something should exist anyway to justify the transfer of funds between A and B, from a tax and accounting perspective.

However, Notice 84-11 is still hanging around out there (in its 16 year "temporary" status), and it specifically says that the leasing agreement need not be in writing.

If I may add an observation, the definition of compensation for plan purposes would require that the amounts be paid for services rendered to the employer. In this case, Company B's payments, regardless of what they are called, are not payments for services that Company A's employees render to Company B.

Please forgive the stupid comment, but this doesn't come close to passsing the "smell test." Am I missing something?

pax, it's a little unusual, but how is it any different than a standard leased employee situation as far as the "smell test" goes? I think there are some testing issues that have to be dealt with (it may end up to be a co-employer situation such that the individuals are employees of both A and b), but I don't see why it would be prima facie prohibited. If you can come up with something more specific, or identify potential abuse (which I think is hard to do with the co-employer rules), I wouldn't mind being wrong.

Why doesn't Company A adopt Company B's plan and create a multiple employer plan?

Because A's employees "perform no services at all for B", the individuals are employed by A and not B under common law. Accordingly, their inclusion in B's plan would automatically create a multiple employer plan.

The arrangement would NOT constitute a de facto leasing arrangement whereby the individuals are employed by B and are leased to A because, under the applicable common law standard, they are not under the direction and control of B. Accordingly, they are not employed by B.

Under this arrangement, I think the Service would consider A to have informally adopted the Company B plan, resulting in a multiple employer plan.

On the bright side, the Form 5500 instructions were changed this year to provide that only the sponsor is responsible for filing the Form 5500 for a multiple employer plan.

wow, the tangled web people weave...

why not simplify all lives and have company A adopt its own d.c. plan?

It will get rid of any liability Company B may have for paying wages for persons who perform no services for it;
it will obviate (my word for today) the need for Company A to set up books to periodically reimburse Company B for its payroll (and other) costs [and vice versa];
it will keep the two companies separate for all state and federal wage and tax filings;
etc., etc., etc.

For some other insights on this issue, you may want to take a look at Derrin Watson's "Whose the Employer Q&A" column on BenefitsLink (start with Q&As 4, 24 and 42).

There are a growing number of commercial enterprises seeking to offer (for a fee) the kind of arrangement described in the query. These enterprises describe themselves as Professional Employer Organizations, or PEO's.

Typically, they would not only provide payroll administration services, but they would effectively come in and "adopt" a user-employer's entire workforce (or portions of the workforce) for various other purposes such as coverage under the PEO's benefit plans (pension and health insurance).

Precisely because of concerns about legal obstacles such as the absence of a common-law employer-employee relationship between the PEO and the "adopted" workforce, for the past several years the PEO industry has been pushing (unsuccessfully, I believe) for legislation that would legitimize these kinds of arrangements under certain conditions.

Let's start with what we know:

1. The exclusive benefit rule of 401(a) provides that a plan can benefit only the employees of the/a plan sponsor and their benficiaries.

2. Calling yourself my employer doesn't make you my employer.

3. Therefore, having A choose to cover B's employees, without making them A's common law employees (rather than employees simply in name) will cause A's plan to be disqualified unless B cosponsors the plan.

Yup. Isn't a multiple employer plan the only way to go then? Although even there, you have to be able to work out who pays the employees compensation so that you can run ADP tests separately for each employer?

Not so much who pays the compensation, but rather who is the employer.

Company B's plan could be disqualified for violating the exclusive benefit rule if the plan covers individuals who are not Company B's common law employees.

I think the main issue comes down to whether you believe the PEO "co-employer" position is defensible. In this part of the country (Southwest), it is prevalent, whether or not defensible, and the IRS has issued approval letters with full disclosure of the situation. At least one of the largest PEO's here was audited a couple years ago and the existence of a 401(k) plan covering "co-employed" individuals was not identified as a problem. I'm not saying it's the correct approach, I am only saying that the Service itself is uncertain about the issue and has not dealt with it consistently.

What you have described is a leasing or agency arrangement and B employees are not A employees and can't be in their plan nor visa versa. The term "employee" is defined in ERISA section 3(6) to mean "any individual employed by an employer." An individual is "employed" by an employer, for purposes of section 3(6), when an employer-employee relationship exists. Whether an employer-employee relationship exists will be determined by applying common law principles and taking into account the remedial purposes of ERISA. See PWBA opinions 92-04A and 92-07A or review courts cases: Nationwide V. Darden, US Supreme court, 1992- another one is Coca-Cola V. Eileen Hilburn, 11th circuit court, no. 98-9608.

Concerning audits of PEO single employer plans, I have represented several PEOs in such audits. The only time they pass is if the agent doesn't understand what a PEO is- the agent has the opinion it is like a Kelly girl operation whereby the the PEO sends temporary people to clients on a short term basis. In that case, the employees belong to the PEO. But, PEOs don't function that way, they take over paying and providing benefits to existing common law employee of the client employer. Only the multiple employer plan arrangement doing worksite testing will fly to an informed IRS agent. Very few big PEO single employer plans are still operating, they have been frozen long ago. The court cases and opinions I listed in my previous response
will support this position.

This is a query to AlanM--have you dealt with health plans sponsored by PEO's, and their status as MEWA's?

The recent inclination is for the DOL to consider them MEWAs on a multiple employer plan basis, however there has been no official PEO guidance issued. A lot of my PEO clients are going ahead and filing as if the health plans were MEWAs instead of taking the chance. There is a bill sponsored by the PEO industry, HR 1891 I believe, that is supposed to answer all of those questions. However, I think it is drafted to much in favor of the PEO and won't be passed.