Suppose an employer with 40 employees leases 3 employees from an agency who are considered temporary. All 3 work for four months and then the employer hires them on as full time employees of its own company. The employer has a 401(k) plan that requires one year of service to be eligible. Must they count all hours from when they were leased employees?

I would think that hours as a leased employee are not counted until the employee works on a substantially full-time basis (1,500 hours). Then all hours would count.

Anyone know the answer to this?

I'd disagree.

Look at IRC Section 414(n)(4)(B). This indicates that periods of service must be taken into account for an employee for purposes of IRC Section 410 (eligibility) even while the individual would have been considered a leased employee but for the 1-year substantially full-time rule.

Thus, it would seem that your employees' period of service includes all the time they were considered leased employees--i.e., hours of service during their first 4 months will count for determining eligibility in the plan. That means that they will meet the plan's year of service eligibility requirement when they complete 1,000 h/s during the 12-month period commencing when they started to perform services. (Had they remained leased employees, they could have been required to complete a 1500-h/s year.)

I concur with Sieve.

Thanks for your insight.