Improper exclusion of workers from participation in employee benefit plans governed by ERISA can jeopardize a plan’s tax-qualified status as determined under the Code and can also provide these workers with a cause of action under ERISA. Retirement plans can lose their tax-qualified status for a variety of reasons, including as a result of “demographic failures” (where the plan does not pass coverage and nondiscrimination tests) or “operational failures” (where an employer impermissibly excludes a common law employee from plan participation believing that the worker is an independent contractor). Worker misclassification can also expose employers to penalties under the Patient Protection and Affordable Care Act for failure to properly account for the number of its employees to determine applicable large employer status as well as its failure to offer any health coverage or to offer adequate or affordable coverage to full-time employees (and their dependents). Further, the employer may be subject to penalties for violating the Code’s annual informational return and statement requirements. Workers who are improperly excluded from ERISA plan participation may be able to bring a lawsuit for benefits due, to enforce rights under a plan or to clarify rights to future benefits, or raise breach of fiduciary duty claims.
Leased employees, as defined under Section 414(n) of the Code, also present additional challenges for plan administration and can place the qualified status of the plan at risk. Leased employees must be counted in the nondiscrimination tests of qualified retirement plans unless a safe harbor exception is met. Leased employees are also counted when conducting nondiscrimination tests for other benefit plans under various provisions of the Code (such as Section 79 (group-term life insurance), Section 106 (contributions by an employer to accident and health plans), Section 125 (cafeteria plans) and Section 132 (certain fringe benefits)). Generally, where these plans do not pass applicable nondiscrimination tests, the benefits that are otherwise provided on a tax-free basis are includible in the income of the key and/or highly compensated employees benefiting under the plan. Furthermore, in the case where a leased employee converts his or her status to that of a regular employee, he or she must be credited with any periods of service previously performed for the employer for purposes of retirement plan eligibility and vesting. Prior service as a leased employee is not required to be credited for determining eligibility under a self-insured medical plan.
Read the full story at The misclassified worker and employee benefit plan considerations