(b)lines Ask the Experts – Leased Employees and 403(b) Plans

“We write a check to the staffing organization, and the staffing organization handles W-2 processing, employment taxes, etc. It would be impossible for such an employee to make elective deferrals to our 403(b) plan; thus, we exclude such employees for elective deferral purposes, as well as for our match, which is tied to elective deferrals. However, I was recently informed that the final 403(b) regulations make no provision for the exclusion of leased employees! If this is correct, is this a “catch-22” situation for us where the law requires us to allow such employees to make elective deferrals to our plan, but we have no such mechanism to do so?” 

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:

Excellent question! The Experts agree that the final 403(b) regulations not only make no provision for the exclusion of leased employees, but the term “leased employee” is not mentioned in the final 403(b) regulations at all! Thus, for guidance in this area, we need to look elsewhere in the Code.

Section 414(n)(1) of the Code, which defines leased employees, generally states that such employees should be treated as employees of the entity leasing the employee, and NOT of the staffing organization. However, Section 414(n)(3) of the Code, indicates that such treatment only applies to the following Code sections:

(A) paragraphs (3), (4), (7), (16), (17), and (26) of section 401 (a),

(B) sections 408 (k), 408 (p), 410, 411, 415, and 416, and

(C) sections 79, 106, 117 (d), 120, 125, 127, 129, 132, 137, 274 (j), 505, and 4980B.

Do you notice a Code section that is conspicuously absent? Yes, that would be Code Section 403(b)! Thus it appears that leased employees are NOT employees of your organization at all for purposes of applying the universal availability and other nondiscrimination rules of the final 403(b) regulations. This is supported by the lack of reference of leased employees in the final 403(b) regulations; the drafters felt no need to craft a specific exclusion for leased employees, since leased employees are not considered to be employees in the first place for purposes of the application of the provisions of 403(b).

Of course, nonprofit employers should consult with counsel familiar with such matters to determine if their own particular use of staffing organizations permits such employees to be excluded from their 403(b) program for all purposes.