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A Better Partnership


Dec 2012
December 04, 2012

A Quick Guide to Leased Employees for Qualified Benefit Plans

A leased employee is an individual who:    
  • works for your company through an agreement with a leasing organization
    (employee of another employer but under your direction or control)
  • on a substantially full-time basis
  (works 1,500 hours or more in a 12-month period (or 75% of the customary hours in that job position, if fewer but at least 500))
  • for at least one year
  (if formerly your common law employee, the common law service counts toward the one year)
You must treat a leased employee like a regular employee for qualified plan purposes, including:    
  • coverage and participation
  (explicitly exclude leased employees if you do not want them to participate)
  • nondiscrimination testing and limits
  (such as coverage testing and, if not excluded from the plan, ADP/ACP testing and limits on contributions and benefits)
  • service crediting for eligibility and vesting
  (all service counts, even before meeting the one-year requirement)
Watch out for an individual changing status:    
  • from leased employee to common law employee
  (count all substantially full-time service even if the services were not performed for at least one year)
  • from common law employee to leased employee
  (generally no severance from employment, so no plan distributions based on severance from employment)
Incorrect handling of leased employees can have an unpleasant ripple effect on your qualified plans. This guide simplifies a complicated set of rules. If you think you may have an issue with leased employees, or you would like to discuss whether you are handling these matters correctly, please contact us.

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