Prehire staffing period counts for qualified-plan eligibility and vesting

Plain-English summary

A company used a staffing agency for workers who typically worked full time under a leasing arrangement for four months before the company hired them directly. Its defined benefit plan required one year of service for participation and five years for full vesting. The company argued that the initial four months should not count because the workers never completed the one-year period needed to become statutory leased employees. Chief Counsel disagreed. Section 414(n)(4)(B) requires service credit for any period during which a later employee would have been a leased employee except for the one-year requirement. The four-month staffing period therefore had to count toward minimum participation and vesting, although the plan's benefit-accrual formula did not necessarily have to count it.

Ruling snapshot

• Question: Must a qualified plan count a worker's four-month staffing-agency period before direct hire when measuring eligibility and vesting service?
• Outcome: advice given (the four months must count for minimum participation and vesting)
• Key authorities: IRC §§ 410, 411, and 414(n)(1) through (4)

Full text (IRS public release)

Office of Chief Counsel
Internal Revenue Service
memorandum
CC:TEGE:EB:QP1:AMalik Third Party Communication: None
PRESP-117145-19 Date of Communication: Not Applicable

Number: 202019018
Release Date: 5/8/2020

UILC: 414.14-00

date: January 24, 2020

to: Sarah Sandusky
Attorney
(TEGE Division Counsel)

from: Neil Sandhu
Senior Technician Reviewer, Qualified Plans Branch 1
Employee Benefits, Exempt Organizations, and Employment Taxes
(Employee Benefits)

subject: Service Crediting Under a Qualified Plan for Individuals Who Worked Under a
Leasing Arrangement

      This Chief Counsel Advice responds to your request for assistance. This advice may
      not be used or cited as precedent.

      This is in reply to a request by your office regarding the calculation of years of service
      under a qualified retirement plan of a company (Company) with respect to individuals
      who initially worked for Company for four months pursuant to a leasing arrangement
      and were subsequently hired by Company as common law employees. Specifically,
      you asked whether the service period prior to these individuals being hired as common
      law employees would be taken into account in calculating years of service for purposes
      of plan eligibility and vesting.

      Facts

      Company uses a staffing agency to hire workers who work for a period of time through a
      leasing arrangement between Company and the staffing agency. Some of these
      workers are subsequently hired by Company as common law employees after the terms
      of the contract between Company and the staffing agency have been satisfied, typically
      after a 4-month period of work through the leasing arrangement. The workers perform
      services for Company on a full-time basis during all relevant periods. Company
      sponsors Plan for its employees. Plan is a qualified defined benefit retirement plan with

PRESP-117145-19 2

a traditional defined benefit formula. Plan requires 1 year of service (elapsed time) to
become a participant and 5 years of service (elapsed time) for participants to be 100%
vested in their benefits.

Law and Analysis

Section 414(n)(1) states that, for purposes of the requirements listed in section
414(n)(3), with respect to any person (hereinafter in section 414(n) referred to as the
“recipient”) for whom a leased employee performs services the leased employee is
treated as an employee of the recipient, but contributions or benefits provided by the
leasing organization which are attributable to service performed for the recipient are
treated as provided by the recipient.

Section 414(n)(2) provides that, for purposes of section 414(n)(1), the term “leased
employee” means any person who is not an employee of the recipient and who provides
services to the recipient if--
(A) such services are provided pursuant to an agreement between the recipient
and any other person (in section 414(n) referred to as the “leasing organization”),
(B) such person has performed such services for the recipient (or for the recipient
and related persons) on a substantially full-time basis for a period of at least 1 year, and
(C) such services are performed under primary direction or control by the
recipient.

Section 414(n)(3) provides, in part, that for purposes of section 414(n), the requirements
listed in section 414(n)(3) include section 410 (minimum participation standards) and
section 411 (minimum vesting standards).

Section 414(n)(4)(A) provides that, in the case of any leased employee,
section 414(n)(1) applies only for purposes of determining whether the requirements
listed in section 414(n)(3) are met for periods after the close of the period referred to in
section 414(n)(2)(B).

Section 414(n)(4)(B) provides that, in the case of a person who is an employee of the
recipient (whether by reason of section 414(n) or otherwise), for purposes of the
requirements listed in section 414(n)(3), years of service for the recipient are
determined by taking into account any period for which such employee would have
been a leased employee but for the requirements of section 414(n)(2)(B).

Section 414(n) was added to the Code under the Tax Equity and Fiscal Responsibility
Act of 1982 (TEFRA), P.L. 97-248. Section 1146(a)(2) of the Tax Reform Act of 1986
(TRA ‘86), P.L. 99-514, titled Clarification of Years of Service, amended section
414(n)(4) to add new section 414(n)(4)(B) (and slightly revise the existing language of
section 414(n)(4) and denote that as section 414(n)(4)(A)). Prior to amendment by TRA
’86, section 414(n)(4) provided that, in the case of any leased employee,
section 414(n)(1) applies only for purposes of determining whether the pension
requirements listed in section 414(n)(3) are met for periods after the close of the 1-year

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period referred in section 414(n)(2); except that years of service for the recipient are
determined by taking into account the entire period for which the leased employee
performed services for the recipient (or related persons).

Company argues that the 4 months of service worked by the now-common law
employees under the leasing arrangement prior to being hired by Company are not
counted for determining years of service for purposes of minimum participation and
vesting because those employees were never leased employees and, thus, section
414(n)(4) does not apply. We disagree. In contrast to section 414(n)(4)(A), section
414(n)(4)(B) does not limit its application to section 414(n)(1). In addition, the opening
language of section 414(n)(4)(B) provides that it applies to employees other than leased
employees. Finally, the language at the end of section 414(n)(4)(B)--by taking into
account any period for which such employee would have been a leased employee but
for the requirements of section 414(n)(2)(B)--supports this position. If Company’s
assertion were correct, the additional period required to be taken into account under
section 414(n)(2)(B) would always be one year (the period of service required to attain
status as a leased employee). But the statute does not reference this one-year period,
or any period, suggesting that there is no requirement to meet the one-year requirement
and be a leased employee for the paragraph to apply. For all these reasons, we
conclude that section 414(n)(4)(B) applies to all individuals who worked under a leasing
arrangement, including those individuals who never met the definition of leased
employee because they did not meet the requirements of section 414(n)(2)(B).

As a result, in this case, pursuant to section 414(n)(4)(B), the 4-month period of work
under the leasing arrangement must be counted for purposes of minimum participation
and vesting, notwithstanding the fact that the now-common law employees never
satisfied the requirements to be leased employees.

We note that this analysis only applies for purposes of the requirements listed in
section 414(n)(3). For example, the benefit accrual formula under the Plan need not
necessarily take into account the period of service under the leasing arrangement.

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call 202-317-5151 if you have any further questions.

                              By: _____________________________
                                   Neil Sandhu
                                   Senior Technician Reviewer
                                   Qualified Plans Branch 1 (Employee Benefits)
                                   Office of Associate Chief Counsel
                                   Employee Benefits, Exempt Organizations, and
                                   Employment Taxes