[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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