Hi All,
I have a client who has a multi-member LLC tree service business. He and his partner are each 50% owners. They have no direct employees but have seven "leased employees." And in this case, I'm not technically referring to the IRS definition of a leased employee but will get to that in a moment. They are simply employed by a payroll company and referred to by that company as "leased employees."
As for the IRS definition of a leased employee, all seven do meet the three criteria spelled out in chapter 1 of IRS Publication 560. Furthermore, the employees do not qualify for any of the three exceptions. Therefore, according to chapter 1 of IRS Publication 560, they "…must generally be treated as your employee for retirement plan purposes…"
SEPs are referenced in chapter 2 of pub 560, but it is not clear in that publication or in other documents on irs.gov whether this particular rule on leased employees being treated as your employees applies to a SEP. It is crystal clear that the rule applies to "qualified plans" but not as clear on SEPs. In chapter 4 (Qualified Plans), this section appears:
"Leased employee. A leased employee, defined in chapter 1, who performs services for you (recipient of the services) is treated as your employee for certain plan qualification rules."
So, here's my question:
Does this rule on a leased employee being treated as your employee for retirement plan purposes apply to SEPs?
The rest of the story is this:
Only one of the employees will meet the "three of the last five years" rule on SEP eligibility by year-end, and it happens to be the employee the owners want to reward (and who makes the most money). However, they are contributing the full amount for themselves and would have to do 25% for him if this "leased employee rule" applies to SEPs. In that case, it appears they would save money AND benefit themselves by doing a New Comparability 401k plan with safe-harbor and giving all the employees a non-elective 3% contribution. This would allow the owners to get up to the full $61k, which they are not quite hitting with the SEP.
Thanks in advance for your time and expertise!
