Leased Employees – Do You Have Them?

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

The Employee Plans Compliance Unit (EPCU) – has recently completed a project on how benefit plan’s are treating leased employees in regards to qualified plan purposes.  What is a leased employee you may ask?

According to the IRS, a leased employee generally is an employee meeting each of the following attributes:

1) Agreement – agreement for services of the leased employee is dictated via an agreement with a 3rd party employee leasing company.
2) Service – service hours must be comparable to that of what a regular company employee would work in the similar job position (but not less than 500hrs in a year). (there are certain exceptions to the service hours rules)
3) Control – generally, if the recipient company a) dictates when, where, and how the leased employee will perform the service, b) dictates which employee must do the job, and c) supervises the lease employee, then control is possessed by the recipient company.

The EPCU’s findings were that a majority of Plans that identified themselves as utilizing leased employees had incorrectly checked the box “yes” on the Form 5500 filing.  Others in the study identified that they did utilize leased employees and appropriately included them in their census for qualified plan purposes.

So what does all this mean for you, and what is the importance of correctly identifying a leased employee?

When a qualified plan has leased employees, those leased employees must be treated as common law employees for purposes of the following significant factors (but not limited too):
1) Plan eligibility
2) Nondiscrimination testing, including Top-Heavy testing
3) Vesting
4) Contributions and Benefits
5) Compensation (especially for ESOPs)

One major consequence of not properly including leased employees for the above factors, would be the fees incurred to correct the Plan, including any contributions required to make the leased employees whole (which usually entails, making contributions for the time the leased employee was available to be a plan participant).

Plans are able to amend their Plan Documents to exclude leased employees from the above factors, but must make sure they have the proper amendments in place, including signed documents by the named plan trustee or administrator, and the amendment must cover the time the company started using leased employees.  If you have further questions regarding leased employees and how they may affect your Plan, please feel free to contact me with your questions.

Victor Fuentes, CPA


  1. Employee leasing is a very popular choice for owners of small- and medium-sized businesses who want to focus on the business, not the administrative burdens behind it.