Identify the working arrangement rather than the invoice label
A founder may use a staffing agency to avoid hiring directly and assume the agency’s workers are irrelevant to the company retirement plan. The retirement rules can require a different analysis. Begin with the service agreement, duration of work, hours and who primarily directs or controls the services. A vendor invoice or agency payroll record does not automatically settle the recipient employer’s plan-qualification obligations.
The IRS describes leased employees under section 414(n), including substantially full-time service for at least one year under the applicable arrangement and direction or control conditions. Certain exceptions involve the leasing organization’s plan and workforce percentages. The owner should identify the actual test before omitting workers from the retirement census.
Calculate the workforce percentage for an exception review
Suppose the relevant nonhighly compensated workforce consists of twenty direct employees and six workers assumed to meet the leased-employee definition. The combined group is twenty-six, and the leased portion is approximately 23.1%. If the applicable exception requires leased employees not to exceed 20% of that workforce, the assumed count raises a problem even if the agency has a retirement arrangement.
If there were four leased employees and twenty direct employees, the percentage would be approximately 16.7%. That numerical condition alone would not establish the exception, because the agency plan’s contribution, participation and vesting conditions also matter. The examples do not classify any worker or define the final denominator. They show why the employer needs both workforce data and the agency plan facts rather than an unsupported statement that the agency handles benefits.
Collect the service and agency plan evidence
Maintain dates of assignment, credited work history, duties and supervision for each agency worker. Identify repeated assignments through different agencies or related recipients that may affect the analysis. A new agency contract should not automatically erase the person’s prior service. Preserve the agreements and factual records needed to determine whether the statutory duration and control conditions are satisfied.
If relying on an exception, obtain the relevant plan information from the leasing organization. Review the required employer contribution, immediate participation and vesting features under the actual rule. A brochure saying the agency offers a 401(k) is not equivalent to evidence that a specific exception applies. Keep the written conclusion and supporting documents with the recipient employer’s plan census so a new administrator can understand why the worker was included or excluded.
Coordinate classification and plan administration
Common-law employee status and leased-employee treatment should be reviewed without assuming the contract’s independent-contractor or agency label controls. A worker who is actually a common-law employee may require a different starting analysis. Give the administrator the complete facts, including who assigns tasks, supplies tools and controls performance, rather than a payroll roster limited to people receiving the company’s own W-2.
If the review changes the census, identify the affected plan provisions and years. Determine coverage, testing and contribution consequences under the applicable rules. Do not promise the founder that excluding agency workers preserves an owner-only plan until that conclusion is supported. Likewise, do not immediately enroll every vendor’s employee without evaluating the actual statutory conditions and plan terms. The company needs a documented classification and administration decision.
Refresh the review when assignments become permanent
Review long-running assignments at least annually and when workers move into direct employment or change agencies. Preserve historical service for the administrator. If an agency stops responding to benefit-information requests, identify the resulting uncertainty rather than continuing to rely indefinitely on an old exception statement.
This article does not determine a worker’s employment status, calculate every coverage test or establish that a particular agency plan satisfies an exception. The agreement, service, supervision and plan facts control. The useful decision is to include staffing arrangements in the owner employer’s retirement review before finalizing the census. That prevents a company from treating a different payroll payer as proof that the people working under its direction can never affect the retirement benefits and testing surrounding the owner’s plan. Give the agency a clear annual information request identifying the specific plan facts needed. A generic certificate that benefits are available may leave the recipient employer unable to support the exception it intended to use, even when the agency responds promptly to ordinary payroll questions.
Sources & further reading
Consult the original guidance and its effective dates. These references support the educational discussion; their application depends on the specific facts.