[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[S. 1269 Introduced in Senate (IS)]







108th CONGRESS
  1st Session
                                S. 1269

  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

                             June 16, 2003

 Mr. Grassley 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 2003''.

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) Successor Employer Status.--For purposes of sections 3121(a) 
and 3306(b)(1)--
            ``(1) 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
            ``(2) 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 or a person 
                described in subsection (e)) who is performing services 
                covered by a contract meeting the requirements of 
                section 7705(e)(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.
    ``(d) Special Rule for Related Party.--Subsection (a) 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) Special Rule for Certain Individuals.--For purposes of the 
taxes imposed under this subtitle, an individual with net earnings from 
self-employment derived from the customer's trade or business 
(including a partner in a partnership that is a customer), is not a 
work site employee with respect to remuneration paid by a certified 
professional employer organization.
    ``(f) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.''.
    (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:
    ``(w) Certified Professional Employer Organizations.--
            ``(1) Plans maintained by certified professional employer 
        organizations.--
                    ``(A) In general.--Except as otherwise provided in 
                this subsection, in the case of a plan or program 
                established or maintained by a certified professional 
                employer organization 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 established or maintained by the certified 
professional employer organization 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) to a plan or 
                        program established by the certified 
                        professional employer organization--
                                    ``(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, 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)), a 2-percent shareholder 
                        (as defined in section 1372(b)(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, disqualified person, a 2-
                        percent shareholder, or shareholder-employee 
                        for purposes of rules applicable to employee 
                        benefit plans maintained by such certified 
                        professional employer organization.
                            ``(iii) Listed requirements.--The 
                        requirements listed in this clause are:
                                    ``(I) Nondiscrimination and 
                                qualification.--Sections 79(d), 105(h), 
                                125(b), 127(b)(2) and (3), 129(d)(2), 
                                (3), (4), and (5), 132(j)(1), 
                                274(j)(3)(B), 401(a)(4), 401(a)(17), 
                                401(a)(26), 401(k)(3) and (12), 
                                401(m)(2) and (11), 404 (in the case of 
                                a plan subject to section 412), 410(b), 
                                412, 414(q), 415, 416, 419, 422, 
                                423(b), 505(b), 4971 4972, 4975, 4976, 
                                4978, and 4979.
                                    ``(II) Size.--Sections 220, 
                                401(k)(11), 401(m)(10), 408(k), and 
                                408(p).
                                    ``(III) Eligibility.--Section 
                                401(k)(4)(B).
                                    ``(IV) Authority.--Such other 
                                similar requirements as the Secretary 
                                may prescribe.
                            ``(iv) Welfare benefit funds.--With respect 
                        to a welfare benefit fund maintained by a 
                        certified professional employer organization 
                        for the benefit of work site employees 
                        performing services for a customer, section 419 
                        shall be treated as not listed in clause 
                        (iii)(I) if the fund provides only 1 or more of 
                        the following:
                                    ``(I) Medical benefits other than 
                                retiree medical benefits.
                                    ``(II) Disability benefits.
                                    ``(III) Group term life insurance 
                                benefits which do not provide for any 
                                cash surrender value or other money 
                                that can be paid, assigned, borrowed or 
                                pledged for collateral for a loan.
                            ``(v) Excise taxes.--Notwithstanding clause 
                        (iii), the certified professional employer 
                        organization and the customer contracting for 
                        work site employees to pay services shall be 
                        jointly and severally liable for the tax 
                        imposed by section 4971 with respect to failure 
                        to meet the minimum funding requirements and 
                        the tax imposed by section 4976 with respect to 
                        funded welfare benefit plans.
                            ``(vi) Continuation coverage 
                        requirements.--For purposes of applying the 
                        provisions of section 4980B with respect to a 
                        group health plan maintained by a certified 
                        professional employer organization for the 
                        benefit of work site employees:
                                    ``(I) Termination of employment 
                                events.--Each of the following events 
                                shall constitute a termination of 
                                employment of a work site employee for 
                                purposes of section 4980B(f)(3)(B):
                                            ``(aa) The work site 
                                        employee ceasing to provide 
                                        services to any customer of 
                                        such certified professional 
                                        employer organization.
                                            ``(bb) The work site 
                                        employee ceasing to provide 
                                        services to one customer of 
                                        such certified professional 
                                        employer organization and 
                                        becoming a work site employee 
                                        with respect to 
another customer of such certified professional employer organization; 
and
                                            ``(cc) The termination of a 
                                        service contract between the 
                                        certified professional employer 
                                        organization and the customer 
                                        with respect to which the work 
                                        site employee performs 
                                        services, provided, however, 
                                        that such a contract 
                                        termination shall not 
                                        constitute a termination of 
                                        employment under section 
                                        4980B(f)(3)(B) for such work 
                                        site employee if, at the time 
                                        of such contract termination, 
                                        such customer maintains a group 
                                        health plan (other than a plan 
                                        providing only excepted 
                                        benefits within the meaning of 
                                        sections 9831 and 9832 or a 
                                        plan covering less than two 
                                        participants who are 
                                        employees).
                                    ``(II) Termination event 
                                constituting a qualifying event.--If an 
                                event described in subparagraph (vi)(I) 
                                also constitutes a qualifying event 
                                under section 4980B(f)(3) with respect 
                                to the group health plan maintained by 
                                the certified professional employer 
                                organization for the affected work site 
                                employee, such plan shall no longer be 
                                required to provide continuation 
                                coverage as of any new coverage date.
                                    ``(III) New coverage date when 
                                termination event constitutes 
                                qualifying event.--For purposes of 
                                subclause (II), a new coverage date 
                                shall be the first date on which--
                                            ``(aa) the customer 
                                        maintains a group health plan 
                                        other than a plan described in 
                                        section 4980B(d), a plan 
                                        providing only excepted 
                                        benefits within the meaning of 
                                        sections 9831 and 9832, or a 
                                        plan covering less than two 
                                        participants who are employees, 
                                        or
                                            ``(bb) a service contract 
                                        between such customer and 
                                        another certified professional 
                                        employee organization becomes 
                                        effective under which worksite 
                                        employees performing services 
                                        for such customer are covered 
                                        under a group health plan of 
                                        such other certified 
                                        professional employee 
                                        organization, other than a plan 
                                        described in section 4980B(d), 
                                        a plan providing only excepted 
                                        benefits within the meaning of 
                                        sections 9831 and 9832, or a 
                                        plan covering less than two 
                                        participants who are employees.
                                    ``(IV) Effect of customer-
                                maintained plan.--As of a new coverage 
                                date described in subclause (III)(aa), 
                                the customer shall be required to make 
                                continuation coverage available to any 
                                qualified beneficiary who was receiving 
                                (or was eligible to elect to receive) 
                                continuation coverage under a certified 
                                professional employer organization's 
                                group health plan and who is, or whose 
                                qualifying event occurred in connection 
                                with, a person whose last employment 
                                prior to such employee's qualifying 
                                event was as a work site employee 
                                providing services to such customer 
                                pursuant to a service contract with 
                                such certified professional employer 
                                organization.
                    ``(C) Effect of new service contract with certified 
                peo.--As of a new coverage date described in subclause 
                (III)(bb), the second certified professional employee 
                organization shall be required to make continuation 
                coverage available to any qualified beneficiary who was 
                receiving (or was eligible to elect to receive) 
                continuation coverage under the first certified 
                professional employer organization's group health plan 
                and who is, or whose qualifying event occurred in 
                connection with, a person whose last employment prior 
                to such employee's qualifying event was as a work site 
                employee providing services to the customer pursuant to 
                a service contract with the first certified 
                professional employer organization.
                            ``(vii) Continued coverage for qualified 
                        beneficiaries.--As of the date that a certified 
                        professional employee organization's group 
                        health plan first provides coverage to one or 
                        more work site employees providing services to 
                        a customer, such group health plan shall be 
                        required to make continuation coverage 
                        available to any qualified beneficiary who was 
                        receiving (or was eligible to receive or elect 
                        to receive) continuation coverage under a group 
                        health plan sponsored by such customer if, in 
                        connection with coverage being provided by the 
                        organization's plan, such customer terminates 
                        each of its group health plans, other than a 
                        plan or plans providing only excepted benefits 
                        within the meaning of sections 9831 and 9832 or 
                        covering less than two participants who are 
                        employees.
                            ``(viii) Effect of termination of peo 
                        status.--The termination of a professional 
                        employer organization's status as a certified 
                        professional employer organization--
                                    ``(I) shall constitute an event 
                                described in section 4980B(f)(3)(B) for 
                                any work site employee performing 
                                services pursuant to a contract between 
                                a customer and such professional 
                                employer organization, but
                                    ``(II) no loss of coverage within 
                                the meaning of section 4980B(f)(3) 
                                occurs unless, in connection with such 
                                termination of status as a certified 
                                professional employer organization, the 
                                individual formerly treated as a work 
                                site employee performing services for 
                                the customer pursuant to a contract 
                                with such professional employer 
                                organization ceases to be covered under 
                                the arrangement of the professional 
                                employer organization that had been, 
                                prior to such termination of status, 
                                the group health plan of such 
                                organization.
                            ``(ix) Person liable for tax.--For purposes 
                        of the liability for tax under section 4980B, 
                        the person or entity required to provide 
                        continuation coverage under this clause (vi) 
                        shall be deemed to be the employer under 
                        section 4980B(e)(1)(A).
            ``(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.
                    ``(C) Eligible employers.--The provisions of 
                sections 457(f)(1)(A) and (B) apply to a work site 
                employee performing services for a customer that is an 
                eligible employer as defined in section 457(e)(1). The 
                preceding sentence shall not apply in the case of a 
                plan described in section 401(a) which includes a trust 
                exempt from tax under section 501(a), an annuity plan 
                or contract described in section 403, the portion of a 
                plan which consists of a transfer of property described 
                in section 83, the portion of a plan which consists of 
                a trust to which section 402(b) applies, or a qualified 
                governmental excess benefit arrangement described in 
                section 415(m).
            ``(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 another certified 
                        professional employer organization or the 
                        customer which covers such work site employees 
                        shall be treated as a successor plan for 
                        purposes of any rules governing in-service 
                        distributions.
                            ``(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 plan 
                        termination with respect to each work site 
                        employee of such customer.
                    ``(B) Distribution rules applicable to subparagraph 
                (a)(ii).--Except as otherwise required by this title, 
                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 and 
                                earnings attributable thereto,
                                    ``(II) qualified nonelective 
                                contributions (within the meaning of 
                                section 401(m)(4)(C)) and earnings 
                                attributable thereto, and
                                    ``(III) matching contributions 
                                described in section 
                                401(k)(3)(D)(ii)(I) and earnings 
                                attributable thereto,
                        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(w) 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 satisfy the bond and 
        independent financial review requirements of subsections (c) on 
        an ongoing basis,
            ``(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 work 
        site employees who are not highly compensated employees for 
        purposes of section 414(q),
            ``(5) computes its taxable income using an accrual method 
        of accounting unless the Secretary approves another method,
            ``(6) agrees to verify the continuing accuracy of 
        representations and information which was previously provided 
        on such periodic basis as the Secretary may prescribe, and
            ``(7) agrees to notify the Secretary in writing of any 
        change that materially affects the continuing accuracy of any 
        representation or information which was previously made or 
        provided.
    ``(c) Requirements.--
            ``(1) In general.--An organization meets the requirements 
        of this paragraph if such organization--
                    ``(A) meets the bond requirements of subparagraph 
                (2), and
                    ``(B) meets the independent financial review 
                requirements of subparagraph (3).
            ``(2) Bond.--
                    ``(A) In general.--A certified professional 
                employer organization meets the requirements of this 
                paragraph if the organization has posted a bond for the 
                payment of taxes under subtitle C (in a form acceptable 
                to the Secretary) that is in an amount at least equal 
                to the amount specified in subparagraph (B).
                    ``(B) Amount of bond.--
                            ``(i) In general.--For the period April 1 
                        of any calendar year through March 31 of the 
                        following calendar year, the amount of the bond 
                        required is equal to the greater of:
                                    ``(I) 5 percent of the 
                                organization's liability for taxes 
                                imposed by this subtitle during the 
                                preceding calendar year (but not to 
                                exceed $1,000,000), or
                                    ``(II) $50,000.
                            ``(ii) Special rule for newly created 
                        professional employer organizations.--During 
                        the first three full calendar years that an 
                        organization is in existence, subclause (I) of 
                        clause (i) shall not apply. For this purpose--
                                    ``(I) under rules provided by the 
                                Secretary, an organization is treated 
                                as in existence as of the date that 
                                such organization began providing 
                                services to any client which were 
                                comparable to the services being 
                                provided with respect to worksite 
                                employees, regardless of whether such 
                                date occurred before or after the 
                                organization is certified under section 
                                7705, and
                                    ``(II) an organization with 
                                liability for taxes imposed by this 
                                subtitle during the preceding calendar 
                                year in excess of $5,000,000 shall no 
                                longer be described in this clause (ii) 
                                as of April 1 of the year following 
                                such calendar year.
            ``(3) Independent financial review requirements.--A 
        certified professional employer organization meets the 
        requirements of this subparagraph if such organization--
                    ``(A) has, as of the most recent audit date, caused 
                to be prepared and provided to the Secretary (in such 
                manner as the Secretary may prescribe) 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, and
                    ``(B) provides to the Secretary an assertion 
                regarding Federal employment tax payments and an 
                examination level attestation on such assertion from an 
                independent certified public accountant not later than 
                the last day of the second month beginning after the 
                end of each calendar quarter. Such assertion shall 
                state that the organization has withheld and made 
                deposits of all taxes imposed by chapters 21, 22, and 
                24 of the Internal Revenue Code in accordance with 
                regulations imposed by the Secretary for such calendar 
                quarter and such examination level attestation shall 
                state that such assertion is fairly stated, in all 
                material respects.
            ``(4) Special rule for small certified professional 
        employer organizations.--The requirements of paragraph (3)(A) 
        shall not apply with respect to a fiscal year of an 
        organization if such organization's liability for taxes imposed 
        by subtitle C during the calendar year ending on (or concurrent 
        with) the end of the fiscal year were $5,000,000 or less.
            ``(5) Failure to file assertion and attestation.--If the 
        certified professional employer organization fails to file the 
        assertion and attestation required by paragraph (3) with 
        respect to a particular quarter, then the requirements of 
        paragraph (3) with respect to such failure shall be treated as 
        not satisfied for the period beginning on the due date for such 
        attestation.
            ``(6) Audit date.--For purposes of paragraph (3)(A), the 
        audit date shall be six months after the completion of the 
        organization's fiscal year.
    ``(d) Suspension and Revocation Authority.--The Secretary may 
suspend or revoke a certification of any person under subsection (b) 
for purposes of section 414(w) or 3511, or both, if the Secretary 
determines that such person is not satisfying the representations or 
requirements of subsections (b) or (c), or fails to satisfy applicable 
accounting, reporting, payment, or deposit requirements.
    ``(e) 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(w) 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 from such other work site as 
                        determined by the Secretary.
    ``(f) Employer Aggregation Rules.--
            ``(1) In general.--For purposes of subsections 
        (c)(2)(B)(ii), (c)(4) and (e), all persons treated as a single 
        employer under subsection (b), (c), (m), or (o) of section 414 
        shall be treated as 1 person.
            ``(2) Plans maintained by companies in same controlled 
        group as certified professional employer organization.--For 
        purposes of subsection (b)(4), if certified professional 
        employer organizations are part of a controlled group, then the 
        certified professional employer organizations (but no other 
        member of the controlled group) shall be treated as 1 person.
            ``(3) 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.
    ``(g) Determination of Employment Status.--Except to the extent 
necessary for purposes of section 414(w) 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.
    ``(h) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section and sections 414(w) and 6503(k).''.
    (d) Conforming Amendments.--
            (1) Section 45(B) of such Code (relating to credit for 
        portion of employer social security taxes paid with respect to 
        employees with cash tips) is amended by adding at the end the 
        following new subsection:
    ``(e) Certified Professional Employer Organizations.--For purposes 
of this section, in the case of a certified professional employer 
organization that is treated, under section 3511, as the employer of a 
worksite employee who is a tipped employee, the credit determined under 
this section does not apply to such organization, but does apply to the 
customer of such organization. For this purpose the customer shall take 
into account any remuneration and taxes remitted by the certified 
professional employer organization.''.
            (2) Section 707 of such Code is amended by adding at the 
        end the following new subsection:
    ``(d) Payments to Certified Professional Employer Organizations.--
If a partnership that is a customer of a certified professional 
employer organization (as defined in section 7705) makes a payment to 
such an organization on behalf of a partner, and the payment, if made 
directly to the partner, would be treated as a guaranteed payment under 
section 707(c), the partnership shall treat the payment as if it were a 
guaranteed payment made to a partner. To the extent that the relevant 
partner receives all or any portion of such a payment, such partner 
shall be treated as receiving a guaranteed payment for services under 
section 707(c).''.
            (3) Section 3302 of such Code is amended by adding at the 
        end the following new subsection:
    ``(h) Treatment of Certified 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.''.
            (4) 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) a certified professional employer organization (as 
        defined in section 7705) is permitted to collect and remit, in 
        accordance with paragraphs (1), (2), and (3), contributions 
        during the taxable year to the State unemployment fund with 
        respect to a work site employee.'', 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)''.
            (5) Section 6053 of such Code (relating to reporting of 
        tips) is amended by adding at the end of subsection (c) the 
        following new paragraph:
            ``(8) Certified professional employer organizations.--For 
        purposes of any report required by this section, in the case of 
a certified professional employer organization that is treated, under 
section 3511, as the employer of a worksite employee, the customer with 
respect to whom a worksite employee performs services shall be the 
employer for purposes of reporting under this section and the certified 
professional employer organization shall furnish to the customer any 
information necessary to complete such reporting no later than such 
time as the Secretary shall prescribe.''.
    (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 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) User Fees.--Subsection (b) of section 10511 of the Revenue Act 
of 1987 (relating to fees for requests for ruling, determination, and 
similar letters) is amended by adding at the end thereof the following 
new paragraph:
            ``(4) Certified professional employer organizations.--The 
        fee charged under the program in connection with the 
        certification by the Secretary of a professional employer 
        organization under section 7705 of the Internal Revenue Code of 
        1986 shall not exceed $500.''.
    (h) Effective Dates.--
            (1) In general.--The amendments made by this Act shall take 
        effect on the later of--
                    (A) January 1, 2005, 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.--For years beginning before the 
        effective date specified in paragraph (1), 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 subsection (c) of this section)).
                                 <all>