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Employee Plans Compliance Unit (EPCU) - Leased Employees

The Employee Plans Compliance Unit (EPCU) Leased Employees project began in March 2010 and ended in May 2011. Compliance contact letters were sent to a sample of sponsors who self identified as using the services of leased employees on their Form 5500 series return by selecting Pension Feature Code ‘3F’ (leased employees). A background of the process and the law follow the results.


Our main finding was 65% of the sponsors in the sample did not actually have any leased employees and instead, the wrong Pension Feature Code had been selected by the sponsor or whoever they had prepare their Form 5500. Many of these sponsors confused the Code section 414(n) definition of leased employees with the general concept of leasing employees. A few sponsors selected Pension Feature Code ‘3F’ (leased employees) when they actually meant to indicate ‘3E’ (Prototype plan). All of these sponsors received a closing letter reminding them to correctly prepare their Form 5500 in the future.  

Although compliance contacts were separated into two categories, with 1/3 of the letters sent to sponsors with 100 or less plan participants and 2/3 going to those with greater than 100 participants, responses indicated there was no difference between these 2 groups on the issue of miscoding their Form 5500 to indicate they had leased employees when they did not.

In 25% of responses, sponsors in the sample correctly applied the leased employee rules. Leased employees were properly excluded from eligibility to participate in the plan in accordance with plan provisions, but they were properly counted for testing purposes. Additionally, the plans appeared to pass coverage based on the number of leased employees. 

A few sponsors discovered to have operational defects during the compliance check process chose to voluntarily correct using the EPCRS correction program. Since a compliance check is not an examination, certain form and operational mistakes can still be self corrected using EPCRS. Finally, additional enforcement action was taken for a small percentage of cases that appeared noncompliant. 


Under Code section 414(n), a leased employee is defined as a person who provides services:

  1. To a recipient company pursuant to an agreement between the recipient company and the leasing organization,
  2. On a substantially full-time basis, and
  3. Under the primary direction or control of the recipient company.

When a recipient company maintains a qualified plan under Code section 414(n), their leased employees are required to be treated as common law employees for purposes of:

  • Eligibility - Code section 410(a);
  • Coverage - Code section 410(b);
  • Nondiscrimination - Code section 401(a)(4);
  • Vesting - Code section 411;
  • Contributions and Benefits - Code section 415;
  • Compensation - Code section 401(a)(17); and
  • Top-Heavy - Code section 416.

If leased employees are not properly treated for plan purposes, they will be excluded from participation and related plan benefits. Additionally, demographic results may be skewed so that testing is incorrectly performed, limitations are improperly calculated and discrimination in favor of highly compensated employees (HCEs) may occur. 

The Project was designed to obtain information about plans maintained by sponsors that employ leased employees to help EP in assessing the need to develop further tools and guidance. The Project goals were to:

  1. Provide sponsors with an overview of leased employee plan requirements;
  2. Determine if plan sponsors are correctly treating leased employees for plan purposes; and
  3. Determine if additional benefits are due to leased employees.

The contact letter sent to plan sponsors provided an overview of leased employee plan requirements along with a series of questions regarding their treatment of leased employees in relation to the plan. The EPCU then reviewed and analyzed the compliance check responses to determine if the sponsor was in compliance with the leased employee requirements or if further corrective action was needed.

Page Last Reviewed or Updated: 14-Sep-2016