[Congressional Bills 106th Congress]
[From the U.S. Government Publishing Office]
[S. 2979 Introduced in Senate (IS)]







106th CONGRESS
  2d Session
                                S. 2979

  To amend the Internal Revenue Code of 1986 to clarify the status of 
  professional employer organizations and to promote and protect the 
interests of professional employer organizations, their customers, and 
                                workers.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                             July 27, 2000

 Mr. Graham (for himself and Mr. Mack) introduced the following bill; 
     which was read twice and referred to the Committee on Finance

_______________________________________________________________________

                                 A BILL


 
  To amend the Internal Revenue Code of 1986 to clarify the status of 
  professional employer organizations and to promote and protect the 
interests of professional employer organizations, their customers, and 
                                workers.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Professional Employer Organization 
Workers Benefits Act of 2000''.

SEC. 2. NO INFERENCE.

    Nothing contained in this Act or the amendments made by this Act 
shall be construed to create any inference with respect to the 
determination of who is an employee or employer--
            (1) for Federal tax purposes (other than the purposes set 
        forth in the amendments made by section 3), or
            (2) for purposes of any other provision of law.

SEC. 3. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZATIONS.

    (a) Employment Taxes.--Chapter 25 of the Internal Revenue Code of 
1986 (relating to general provisions relating to employment taxes) is 
amended by adding at the end the following new section:

``SEC. 3511. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZATIONS.

    ``(a) General Rules.--For purposes of the taxes imposed by this 
subtitle--
            ``(1) a certified professional employer organization shall 
        be treated as the employer (and no other person shall be 
        treated as the employer) of any work site employee performing 
        services for any customer of such organization, but only with 
        respect to remuneration remitted by such organization to such 
        work site employee, and
            ``(2) the exemptions and exclusions which would (but for 
        paragraph (1)) apply shall apply with respect to such taxes 
        imposed on such remuneration.
    ``(b) Secondary Customer Liability for Employment Taxes.--
            ``(1) In general.--Notwithstanding subsection (a), if--
                    ``(A) as of the date any payment of taxes imposed 
                by this subtitle is due, the certified professional 
                employer organization does not meet the requirements of 
                paragraph (3),
                    ``(B) the customer has not made adequate payments 
                to the certified professional employer organization 
                pursuant to the service contract under this subtitle 
                with respect to work site employees performing services 
                for such customer, or
                    ``(C) in accordance with regulations prescribed by 
                the Secretary, the Secretary determines that the 
                application of this subsection to a class of customers 
                which includes such customer is appropriate to prevent 
                an undue and large risk with respect to the ultimate 
                collection of taxes under this subtitle,
        the customer shall, subject to paragraph (2), also be liable 
        for any payment under this subtitle which the organization is 
        required to make under this section.
            ``(2) Special rule.--The Secretary shall not take any 
        action against the customer with respect to liability under 
        paragraph (1) until after 45 days--
                    ``(A) after notice and demand by the Secretary 
                against the certified professional employer 
                organization for taxes due under this subtitle, or
                    ``(B) in the case of a failure to file a return 
                with respect to such taxes, after such return was due.
            ``(3) Requirements.--
                    ``(A) In general.--An organization meets the 
                requirements of this paragraph with respect to a 
                payment if--
                            ``(i) the organization meets--
                                    ``(I) the net worth requirements of 
                                subparagraph (B) as of the last day of 
                                both the fiscal quarter of the fiscal 
                                year of the organization in which the 
                                payment is due and the preceding 
                                quarter, or
                                    ``(II) the bond requirements of 
                                subparagraph (C) at all times during 
                                the fiscal quarter in which the payment 
                                is due, and
                            ``(ii) the organization provides to the 
                        Secretary an examination level attestation from 
                        an independent certified public accountant not 
                        later than the last day of the second month 
                        beginning after the end of the calendar quarter 
                        in which the payment is due that there is no 
                        material reason to question the organization's 
                        assertions with respect to the adequacy of 
                        Federal employment tax payments for such 
                        calendar quarter.
                    ``(B) Net worth.--The requirements of this 
                subparagraph are as follows:


``If number of work site employees    Its net worth must be at least:
 is:
 
Less than 500.......................  $50,000.
500 or more but less than 1,500.....  $100,000.
1,500 or more but less than 2,500...  $150,000.
2,500 or more but less than 4,000...  $200,000.
4,000 or greater....................  $250,000.
 

                    ``(C) Bond.--An organization meets the requirements 
                of this subparagraph if such organization posts a bond 
                for the payment of taxes under this subtitle in a form 
                acceptable to the Secretary and in an amount equal to 
                the amount described in subparagraph (B) with respect 
                to such organization.
                    ``(D) Failure to file.--If the certified 
                professional employer organization fails to file the 
                attestation required by subparagraph (A)(ii) with 
                respect to a particular quarter, then the requirements 
                of this paragraph with respect to such failure shall be 
                treated as not satisfied for the period beginning on 
                the due date for such attestation and ending on the 
                first day of the first calendar quarter following 2 
                consecutive calendar quarters (beginning after the 
                failure) for which such attestation requirement is met.
                    ``(E) Exclusion of goodwill and other 
                intangibles.--For purposes of this paragraph, net worth 
                shall be determined without regard to goodwill and 
                other intangibles.
            ``(4) Successor employer status.--For purposes of sections 
        3121(a) and 3306(b)(1)--
                    ``(A) a certified professional employer 
                organization entering into a service contract with a 
                customer with respect to a work site employee shall be 
                treated as a successor employer and the customer shall 
                be treated as a predecessor employer, and
                    ``(B) a customer whose service contract with a 
                certified professional employer organization is 
                terminated with respect to a work site employee shall 
                be treated as a successor employer and the certified 
                professional employer organization shall be treated as 
                a predecessor employer.
    ``(c) Liability With Respect to Individuals Purported To Be Work 
Site Employees.--
            ``(1) General rules.--Solely for purposes of its liability 
        for the taxes imposed by this subtitle--
                    ``(A) the certified professional employer 
                organization shall be treated as the employer of any 
                individual (other than a work site employee) who is 
                performing services covered by a contract meeting the 
                requirements of section 7705(d)(2)(F), but only with 
                respect to remuneration remitted by such organization 
                to such individual, and
                    ``(B) the exemptions and exclusions which would 
                (but for subparagraph (A)) apply shall apply with 
                respect to such taxes imposed on such remuneration.
            ``(2) Liability.--Paragraph (1) shall not be construed to 
        relieve liability of any other individual or entity for such 
        taxes.
    ``(d) Special Rule for Related Party.--Subsections (a) and (b) 
shall not apply in the case of a customer which bears a relationship to 
a certified professional employer organization described in section 
267(b) or 707(b). For purposes of the preceding sentence, such sections 
shall be applied by substituting `10 percent' for `50 percent'.
    ``(e) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section, including--
            ``(1) rules for the appropriate allocation (including on a 
        pro rata basis) of payments of taxes made by professional 
        employee organizations among customers also liable for such 
        taxes, and
            ``(2) rules for applying this section to professional 
        employee organizations which are not in existence for quarters 
        preceding the quarter in which a service contract under section 
        7705(d)(2)) is in effect.''
    (b) Employee Benefits.--Section 414 of such Code (relating to 
definitions and special rules) is amended by adding at the end the 
following new subsection:
    ``(v) Certified Professional Employer Organizations.--
            ``(1) Plans maintained by certified professional employer 
        organizations.--
                    ``(A) In general.--Except as otherwise provided in 
                this subsection, if a certified professional employer 
                organization establishes or maintains a plan to provide 
                employee benefits to work site employees, then, for 
                purposes of applying the provisions of this title 
                applicable to such benefits--
                            ``(i) such plan shall be treated as a 
                        single employer plan established and maintained 
                        by the organization,
                            ``(ii) the organization shall be treated as 
                        the employer of the work site employees 
                        eligible to participate in the plan, and
                            ``(iii) the portion of such plan covering 
                        work site employees shall not be taken into 
                        account in applying such provisions to the 
                        remaining portion of such plan or to any other 
                        plan providing employee benefits (other than to 
                        work site employees).
                    ``(B) Special exceptions in applying rules to 
                benefits.--
                            ``(i) In general.--In applying any 
                        requirement listed in clause (iii)--
                                    ``(I) the portion of the plan 
                                established by the certified 
                                professional employer organization 
                                which covers work site employees 
                                performing services for a customer 
                                shall be treated as a separate plan of 
                                the customer (including for purposes of 
                                any disqualification or correction),
                                    ``(II) the customer shall be 
                                treated as establishing and maintaining 
                                the plan, as the employer of such 
                                employees, and as having paid any 
                                compensation remitted by the certified 
                                professional employer organization to 
                                such employees under the service 
                                contract entered into under section 
                                7705(d), and
                                    ``(III) a controlled group that 
                                includes a certified professional 
                                employer organization shall not include 
                                in the controlled group any work site 
                                employees performing services for a 
                                customer.
                        For purposes of subclause (III), all persons 
                        treated as a single employer under subsections 
                        (b), (c), (m), and (o) shall be treated as 
                        members of the same controlled group.
                            ``(ii) Self-employed individuals.--A work 
                        site employee who would be treated as a self-
                        employed individual (as defined in section 
                        401(c)(1)), a disqualified person (as defined 
                        in section 4975(e)(2)), or a shareholder-
                        employee (as defined in section 4975(f)(6)(C)), 
                        but for the relationship with the certified 
                        professional employer organization, shall be 
                        treated as a self-employed individual for 
                        purposes of determining eligibility for 
                        employee benefit plans maintained by such 
                        certified professional employer organization.
                            ``(iii) Listed requirements.--The 
                        requirements listed in this clause are--
                                    ``(I) Nondiscrimination.--Sections 
                                79(d), 105(h), 125(b), 127(b), 129(d), 
                                132(j)(1), 274(j)(3)(B), 401(a)(4), 
                                401(a)(17), 401(a)(26), 401(k)(3), 
                                401(m)(2), 410(b), 414(q), 415, 416, 
                                422, 423(b), and 505(b).
                                    ``(II) Size.--Sections 220, 
                                401(k)(11), 401(m)(10), 408(k), and 
                                408(p).
                                    ``(III) Eligibility.--Section 
                                401(k)(4)(B).
            ``(2) Plans maintained by customers of certified 
        professional employer organizations.--If a customer of a 
        certified professional employer organization provides (other 
        than through such organization) any employee benefits, then 
        with respect to such benefits--
                    ``(A) work site employees of the organization who 
                perform services for the customer shall be treated as 
                leased employees of such customer,
                    ``(B) such customer shall be treated as a recipient 
                for purposes of subsection (n), and paragraphs (4) and 
                (5) of subsection (n) shall not apply for such 
                purposes, and
                    ``(C) with respect to such work site employees, 
                sections 105(h), 403(b)(12), 422, and 423 shall be 
                treated as a benefit listed in subsection (n)(3)(C).
            ``(3) Plans maintained by companies in same controlled 
        group as certified professional employer organization.--In 
        applying any requirement listed in paragraph (1)(B)(iii), a 
        controlled group which includes a certified professional 
        employer organization shall not include in such controlled 
        group any work site employees performing services for a 
        customer. For purposes of this paragraph, all persons treated 
        as a single employer under subsections (b), (c), (m) and (o) 
        shall be treated as members of the same controlled group.
            ``(4) Rules applicable to plans maintained by certified 
        professional employer organizations and plans maintained by 
        their customers.--
                    ``(A) Service crediting for participation and 
                vesting purposes.--In the case of a plan maintained by 
                a certified professional employer organization or a 
                customer, for purposes of determining a work site 
                employee's service for eligibility to participate and 
                vesting under sections 410(a) and 411, rules similar to 
                the rules of paragraphs (1) and (3) of section 413(c) 
                shall apply to service for the certified professional 
                employer organization and customer.
                    ``(B) Compensation.--
                            ``(i) In general.--Except as provided in 
                        clause (ii), for purposes of subsection (s) and 
                        section 415(c)(3), or other comparable 
                        provisions of this title based on compensation 
                        which affects employee benefit plans, 
                        compensation received from the customer with 
                        respect to which the work site employee 
                        performs services shall be taken into account 
                        together with compensation received from the 
                        certified professional employer organization.
                            ``(ii) Exception.--For purposes of applying 
                        sections 404 and 412 to a plan maintained by a 
                        certified professional employer organization, 
                        only compensation received from the certified 
                        professional employer organization shall be 
                        taken into account.
            ``(5) Special rules where multiple plans.--
                    ``(A) In general.--For purposes of applying section 
                415 with respect to a plan maintained by a certified 
                professional employer organization, the organization 
                and customers of such organization shall be treated as 
                a single employer, except that if plans are maintained 
                by a certified professional employer organization and a 
                customer with respect to a work site employee, any 
                action required to be taken by such plans shall be 
                taken first with respect to the plan maintained by the 
                customer.
                    ``(B) Minimum benefit.--If a minimum benefit is 
                required to be provided under section 416, such benefit 
                shall, to the extent possible, be provided through the 
                plan maintained by the certified professional employer 
                organization.
            ``(6) Termination of service contract between certified 
        professional employer organization and customer.--
                    ``(A) In general.--
                            ``(i) Treatment of successor plan.--If a 
                        service contract between a customer and a 
                        certified professional employer organization is 
                        terminated and work site employees of the 
                        customer were covered by a plan maintained by 
                        the organization, then, except as provided in 
                        regulations, any plan of a certified 
                        professional employer organization or the 
                        customer which covers such work site employees 
                        shall be treated as a successor plan.
                            ``(ii) Treatment as severance from 
                        employment and separation from service.--If a 
                        service contract between a customer and a 
                        certified professional employer organization is 
                        terminated, and there is no plan treated as a 
                        successor plan under clause (i), then such 
                        termination shall be treated as a severance 
                        from employment and a separation from service 
                        of each work site employee of such customer.
                    ``(B) Distribution rules applicable to subparagraph 
                (A)(ii).--In any case to which subparagraph (A)(ii) 
                applies, the certified professional employer 
                organization plan may distribute--
                            ``(i) during the 2-year period beginning on 
                        the date of such termination (in accordance 
                        with plan terms) only--
                                    ``(I) elective deferrals,
                                    ``(II) qualified nonelective 
                                contributions (within the meaning of 
                                section 401(m)(4)(C)), and
                                    ``(III) matching contributions 
                                described in section 
                                401(k)(3)(D)(ii)(I),
                        of former work site employees associated with 
                        the terminated customer only in a direct 
                        rollover described in section 401(a)(31), and
                            ``(ii) after such 2-year period, amounts in 
                        such plan in accordance with plan terms.''
    (c) Certified Professional Employer Organization Defined.--Chapter 
79 of such Code (relating to definitions) is amended by adding at the 
end the following new section:

``SEC. 7705. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZATIONS.

    ``(a) In General.--For purposes of this title, the term `certified 
professional employer organization' means a person who applies to be 
treated as a certified professional employer organization for purposes 
of sections 414(v) and 3511 and who has been certified by the Secretary 
as meeting the requirements of subsection (b).
    ``(b) Certification.--A person meets the requirements of this 
subsection if such person--
            ``(1) demonstrates that such person (and any owner, 
        officer, and such other persons as may be specified in 
        regulations) meets such requirements as the Secretary shall 
        establish with respect to tax status, background, experience, 
        business location, and annual financial audits,
            ``(2) represents that it will provide the Secretary within 
        6 months after the close of each fiscal year of such person 
        ending after certification pursuant to this section with an 
        opinion of an independent certified public accountant as to 
        whether the certified professional employer organization's 
        financial statements are presented fairly in accordance with 
        generally accepted accounting principles,
            ``(3) represents that it will satisfy such reporting 
        obligations as may be imposed by the Secretary,
            ``(4) represents that it will maintain a qualified plan (as 
        defined in section 408(p)(2)(D)(ii)) or an arrangement to 
        provide simple retirement accounts (within the meaning of 
        section 408(p)) which benefit at least 95 percent of all its 
        work site employees, and
            ``(5) agrees to notify the Secretary in writing of any 
        change that affects the continuing accuracy of any 
        representation or information which was previously made or 
        provided.
    ``(c) Suspension and Revocation Authority.--The Secretary may 
suspend or revoke a certification of any person under subsection (b) 
for purposes of section 414(v) or 3511, or both, if the Secretary 
determines that such person is not satisfying the requirements or 
representations of subsection (b) or fails to satisfy applicable 
reporting, payment, or deposit requirements.
    ``(d) Work Site Employee.--For purposes of this title--
            ``(1) In general.--The term `work site employee' means, 
        with respect to a certified professional employer organization, 
        an individual who--
                    ``(A) performs services for a customer pursuant to 
                a contract which is between such customer and the 
                certified professional employer organization and which 
                meets the requirements of paragraph (2), and
                    ``(B) performs services at a work site meeting the 
                requirements of paragraph (3).
            ``(2) Service contract requirements.--A contract meets the 
        requirements of this paragraph with respect to an individual 
        performing services for a customer if such contract is in 
        writing and provides that the certified professional employer 
        organization shall--
                    ``(A) assume responsibility for payment of wages to 
                the individual, without regard to the receipt or 
                adequacy of payment from the customer for such 
                services,
                    ``(B) assume responsibility for reporting, 
                withholding, and paying any applicable taxes under 
                subtitle C, with respect to the individual's wages, 
                without regard to the receipt or adequacy of payment 
                from the customer for such services,
                    ``(C) assume responsibility for any employee 
                benefits which the service contract may require the 
                certified professional employer organization to 
                provide, without regard to the receipt or adequacy of 
                payment from the customer for such services,
                    ``(D) assume shared responsibility with the 
                customer for firing the individual and for recruiting 
                and hiring any new worker,
                    ``(E) maintain employee records relating to the 
                individual, and
                    ``(F) agree to be treated as a certified 
                professional employer organization for purposes of 
                sections 414(v) and 3511 with respect to such 
                individual.
            ``(3) Work site coverage requirement.--
                    ``(A) In general.--The requirements of this 
                paragraph are met with respect to an individual if at 
                least 85 percent of the individuals performing services 
                for the customer at the work site where such individual 
                performs services are subject to 1 or more contracts 
                with the certified professional employer organization 
                which meet the requirements of paragraph (2).
                    ``(B) Special rules.--For purposes of subparagraph 
                (A)--
                            ``(i) Work site.--The term `work site' 
                        means a physical location at which an 
                        individual generally performs service for the 
                        customer or, if there is no such location, the 
                        location from which the individual receives job 
                        assignments from the customer.
                            ``(ii) Contiguous locations.--For purposes 
                        of clause (i), work sites which are contiguous 
                        locations shall be treated as a single physical 
                        location.
                            ``(iii) Noncontiguous locations.--For 
                        purposes of clause (i), noncontiguous locations 
                        shall be treated as separate work sites, except 
                        that each work site within a reasonably 
                        proximate area must satisfy the 85 percent test 
                        under subparagraph (A) for the individuals 
                        performing services for the customer at such 
                        work site. In determining whether noncontiguous 
                        locations are reasonably proximate, all facts 
                        and circumstances shall be taken into account.
                            ``(iv) Work sites 35 miles or more apart.--
                        Any work site which is separated from all other 
                        customer work sites by at least 35 miles shall 
                        not be treated as reasonably proximate under 
                        clause (iii).
                            ``(v) Different industry.--A work site 
                        shall not be treated as reasonably proximate to 
                        another work site under clause (iii) if the 
                        work site operates in a different industry or 
                        industries or for a different business purpose 
                        from such other work site as determined by the 
                        Secretary.
    ``(e) Employer Aggregation Rules.--
            ``(1) In general.--For purposes of subsections (b)(4) and 
        (d), all persons treated as a single employer under subsection 
        (b), (c), (m), or (o) of section 414 shall be treated as 1 
        person.
            ``(2) Qualified plans.--For purposes of subsection (b)(4)--
                    ``(A) a qualified plan (as defined in section 
                408(p)(2)(D)(ii)) which is maintained by, or an 
                arrangement to provide a simple retirement account 
                (within the meaning of section 408(p)) to, a customer 
                with respect to a work site employee performing 
                services for such customer shall be treated as if it 
                were maintained by the applicant, and
                    ``(B) work site employees who do not meet the 
                minimum age and service requirements of section 
                410(a)(1)(A) (or who are excludable from consideration 
                under section 410(b)(3)) shall not be taken into 
                account.
    ``(f) Determination of Employment Status.--Except to the extent 
necessary for purposes of section 414(v) or 3511, nothing in this 
section shall be construed to affect the determination of who is an 
employee or employer for purposes of this title.
    ``(g) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section and sections 414(v) and 6503(k).''
    (d) Conforming Amendments.--
            (1) Section 3302 of such Code is amended by adding at the 
        end the following new subsection:
    ``(h) Treatment of Professional Employer Organizations.--If a 
certified professional employer organization (as defined in section 
7705) (or a client of such organization) makes a payment to the State's 
unemployment fund with respect to a work site employee, such 
organization shall be eligible for the credits available under this 
section with respect to such payment.''
            (2) Section 3303(a) of such Code is amended--
                    (A) by inserting ``and'' at the end of paragraph 
                (3),
                    (B) by inserting immediately after paragraph (3) 
                the following new paragraph:
            ``(4) the reduced rates of contributions permitted by 
        paragraphs (1), (2), and (3) are available to a certified 
        professional employer organization (as defined in section 7705) 
        for contributions by such entity (or a client) paid with 
        respect to a work site employee into a State unemployment fund 
during the taxable year.'', and
                    (C) in the last sentence--
                            (i) by striking ``paragraphs (1), (2), and 
                        (3)'' and inserting ``paragraphs (1), (2), (3), 
                        and (4)'', and
                            (ii) by striking ``paragraph (1), (2), or 
                        (3)'' and inserting ``paragraph (1), (2), (3), 
                        or (4)''.
            (3) Section 6503 of such Code is amended by redesignating 
        subsection (k) as subsection (l) and by inserting after 
        subsection (j) the following new subsection:
    ``(k) Extension in Case of Customers With Liability.--With respect 
to any liability of a customer under section 3511(b), the period of 
limitation for the assessment of any tax imposed under subtitle C shall 
not expire before the date which is 1 year after the date it would 
otherwise expire.''
    (e) Clerical Amendments.--
            (1) The table of sections for chapter 25 of such Code is 
        amended by adding at the end the following new item:

                              ``Sec. 3511. Certified professional 
                                        employer organizations.''
            (2) The table of sections for chapter 79 of such Code is 
        amended by inserting after the item relating to section 7704 
        the following new item:

                              ``Sec. 7705. Certified professional 
                                        employer organizations.''
    (f) Reporting Requirements and Obligations.--The Secretary of the 
Treasury shall develop such reporting and recordkeeping rules, 
regulations, and procedures as the Secretary determines necessary or 
appropriate to ensure compliance with the amendments made by this Act 
with respect to entities applying for certification as certified 
professional employer organizations or entities that have been so 
certified. Such rules shall require the certified professional employer 
organizations to report to customers whether they have filed the 
attestations required by section 3511(b)(3) of the Internal Revenue 
Code of 1986 (as added by this section). Such rules shall, however, be 
designed in a manner which streamlines, to the extent possible, the 
application of requirements of such amendments, the exchange of 
information between a certified professional employer organization and 
its customers, and the reporting and recordkeeping obligations of the 
certified professional employer organization.
    (g) Effective Dates.--
            (1) In general.--The amendments made by this Act shall take 
        effect on the later of--
                    (A) January 1, 2002, or
                    (B) the January 1st of the first calendar year 
                beginning more than 12 months after the date of the 
                enactment of this Act.
            (2) Certification program.--The Secretary of the Treasury 
        shall establish the certification program described in section 
        7705(b) of the Internal Revenue Code of 1986 not later than 3 
        months before the effective date determined under paragraph 
        (1).
            (3) Transition issues.--Subject to such conditions as the 
        Secretary of the Treasury may prescribe, employee benefit plans 
        in existence on the date of the enactment of this Act shall not 
        be treated as failing to meet the requirements of the Internal 
        Revenue Code of 1986 merely because such plans were maintained 
        by an organization prior to such organization becoming a 
        certified professional employer organization (as defined by 
        section 7705 of such Code (as added by section 3 of this Act)).
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