[Congressional Record Volume 142, Number 138 (Monday, September 30, 1996)]
[Extensions of Remarks]
[Pages E1845-E1847]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                     STAFFING FIRMS WORKER BENEFITS

                                 ______
                                 

                        HON. BENJAMIN L. CARDIN

                              of maryland

                    in the house of representatives

                      Saturday, September 28, 1996

  Mr. CARDIN. Mr. Speaker, one of the most significant changes in our 
economy in recent years has been the growth of staffing firms. These 
firms employ individuals on a temporary or a long-term basis and assign 
them to client companies as needed.
  The rapid expansion of these employment arrangements in our economy 
has give rise to a number of difficult questions in the area of 
employment taxes, as well as retirement, health, and other benefits. 
Our Nation's tax laws require employers to collect employment taxes, 
and offer tax-favored treatment for employer-provided fringe benefits.
  Within our existing tax system, the ability to identify clearly who 
is the employer of a group of workers is crucial to the enforcement of 
the law. These issues also have important consequences for working 
Americans seeking the benefits of health insurance and pension coverage 
through their employment.
  As more and more companies make use of staffing firms in meeting 
their needs for temporary and long-term workers, it will become 
necessary for the Congress to examine the application of our tax laws 
to these arrangements. Among the issues we must consider are the 
ability of staffing firms under existing law to act as employer for the 
purposes of collecting and paying employment taxes, as well as 
retirement and health benefits.
  I have been working, along with my Ways and Means colleague Rep. 
Portman, on a proposal that addresses many of these issues. We are 
putting the proposal forward at this time in the hope that it will draw 
comment from concerned parties. We hope to continue to work on this 
issue in the 105th Congress.
  The draft proposal, along with a brief section by section summary, 
follows.

     Technical Summary of Staffing Firm Worker Benefits Act of 1996

       Overview. In general, the bill amends the Internal Revenue 
     Code to make it clear that a ``qualified staffing firm'' is 
     the employer of the employees covered by staffing 
     arrangements, both for purposes of employment tax liability 
     and for purposes of employee benefit plan sponsorship. The 
     bill also amends the leased employee and separate line of 
     business provisions of Code section 414 to encourage 
     retirement and fringe benefit coverage of employees of 
     qualified staffing firms.
       Introduction/Section 1. Staffing firms serve a variety of 
     business needs, and their services are referred to in a 
     variety of ways, e.g., temporary help, long-term staffing, 
     managed services, and professional employer arrangements. In 
     the latter type of arrangement, primarily small to mid-size 
     firms transfer their payroll and human resources functions to 
     the staffing firm in order to concentrate on their core 
     business. Staffing firms provide their services to customers 
     on a contract or fee basis. The workers supplied by the 
     staffing firm assumes the role of employer with respect to 
     these workers in a number of ways, e.g., paying the workers' 
     wages, paying employment taxes with respect to these wages, 
     retaining authority for hiring, reassigning, and dismissing 
     the workers, etc. Because of the nature of their work, 
     though, staffing firm employees normally are under the day-
     to-day supervision of the customer where they work.
       The relationship that staffing firms typically establish 
     with customers is built on the fundamental premise that the 
     staffing firm, and not the customer, is responsible to 
     staffing firm employees who work at the customer's work site 
     for the payment of wages, and to the extent applicable, any 
     specified employee benefits. While in many staffing 
     arrangements there is no question that the staffing firm is 
     the employer of its employees under the traditional common-
     law test, in other staffing arrangements this is less clear. 
     For example, the Internal Revenue Service has established a 
     market segment study of the ``employee leasing'' industry and 
     is questioning whether, in certain types of arrangements 
     involving staffing firms, the staffing firm is properly 
     regarded as the ``employer'' for purposes of employment tax 
     withholding and for purposes of maintaining employee benefit 
     plans. An adverse holding on these issues could undermine the 
     401(k) and other benefits of staffing firm employees, as well 
     as disrupt the business relationship between the staffing 
     firm and the customer.
       Section 2. This section of this bill is designed to codify 
     the status of a ``qualified staffing firm'' as the entity 
     with exclusive responsibility for federal employment taxes 
     (income, FICA, and FUTA) with respect to workers covered by 
     contracts between the firm and its customers. Implicit in 
     this rule is that the customer will not have liability for 
     such employment taxes if, for some reason, the qualified 
     staffing firm does not pay.
       This special rule is intended to apply only with respect to 
     workers who are properly classified as employees, and not 
     independent contractors, and to clarify that the qualified 
     staffing firm, and not the customer, is these employees' 
     employer. The rule applies whether or not the qualified 
     staffing firm would otherwise be held to be the employer of 
     these employees under the common-law test. No inference is 
     intended as to the employer status of a qualified staffing 
     firm under the common-law test.
       Section 2(d) defines a ``qualified staffing firm'' for 
     purposes of the special ``employer'' treatment accorded by 
     the bill. This definition requires that the staffing firm 
     must be liable for the worker's wages, the related employment 
     taxes, and any agreed-upon employee benefits, without regard 
     to the receipt or adequacy of the customer's payments. In 
     addition, the staffing firm must have authority to hire, 
     reassign, and dismiss the workers, and must maintain employee 
     records relating to the workers, and must have responsibility 
     for addressing the workers' complaints, claims, etc., 
     relating to their employment. The fact that the customer may 
     also have some involvement in these matters will not preclude 
     a staffing firm from qualifying under this definition. Thus, 
     the requirements of the definition will be met even though 
     the staffing firm may take into account the customer's views 
     in hiring or dismissing workers, the customer may maintain 
     its own set of records with respect to the workers, or the 
     customer may share responsibility for addressing the workers' 
     complaints, claims, etc.
       Section 3. This section amends an existing rule in section 
     7701(a)(20) in the Internal Revenue Code for full-time life 
     insurance salesmen. That rule treats such sales 
     representatives, who otherwise would be classified as 
     independent contractors, as common-law employees for purposes 
     of certain specified employee common-law employees for 
     purposes of certain specified employee benefits. This enables 
     them to enjoy the tax-favored treatment that the Code affords 
     such benefits when furnished to employees.
       The bill does not alter the rule for the life insurance 
     salesmen, but adds a new subparagraph (B) that is designed to 
     treat individuals who would be treated as employees of the 
     qualified staffing firm under the employment tax provisions 
     as employees of such firm for purposes of the employee 
     benefit provisions that are listed in the text. The employee 
     benefits provisions include those relating to group-term life 
     insurance, accident and health plans, profit-sharing and 
     retirement plans (including 401(k) and savings plans, but 
     excluding defined benefit plans), cafeteria plans, dependent 
     care programs, educational assistance programs, employer-
     provided fringe benefits, VEBAs, and employee achievement 
     awards. The bill also makes it clear that these individuals 
     will be treated as employees of the staffing firm for 
     purposes of applying the provisions of section 414(n), and 
     thus may be counted as ``leased employees'' of the customer 
     if the other requirements of section 414(n) are met.
       In addition, the bill clarifies that a worker will be 
     treated as having separated from service if the worker ceases 
     to be employed by the customer and becomes employed by the 
     qualified staffing firm, or ceases to be employed by the 
     qualified staffing firm and becomes employed by the customer. 
     This will allow distribution of the worker's benefits under 
     the 401(k) or retirement plan of the worker's prior employer. 
     This provision is not intended to negate the application of 
     the special leased employee service crediting rule under 
     section 414(n)(4)(B).

[[Page E1846]]

       Section 4. The bill contemplates that the general ``leased 
     employee'' rule of section 414(n) will continue to apply to a 
     customer. Under this rule, the customer must count a ``leased 
     employee'' as its own employee for purposes of testing its 
     plans under the IRS coverage and nondiscrimination rules.
       Section 4(a) of the bill amends the leased employee 
     provisions in section 414(n) so that they apply for purposes 
     of section 401(k) and 401(m). This is intended to ensure that 
     a customer will get credit, in accordance with section 
     414(n)(1)(B), for elective deferrals, matching contributions, 
     and employee contributions, that are made on behalf of a 
     leased employee.
       Section 4(b) of the bill clarifies that a customer may 
     choose to include a qualified staffing firm employee in the 
     customer's plan as long as the employee is a leased employee 
     of the customer, or would be a leased employee, but for the 
     fact that the person has not yet worked the requisite time 
     period specified in section 414(n)(2)(B) to be a leased 
     employee. The bill language is designed to ensure that a 
     qualified staffing firm worker who is covered by a customer's 
     plan will be treated as an employee of the customer for 
     purposes of applying the tax rules governing customer 
     contributions to such plan, the tax-exempt status of any 
     related trust under the plan, and distributions or payments 
     under such plan. This provision applies for purposes of 
     benefits that are tested by application of the leased 
     employee rules, and also for purposes of stock option plans, 
     section 403(b) annuities, and accident and health plans.
       Section 4(c) of the bill sets forth provisions for the 
     treatment of qualified staffing firm employees under the 
     qualified staffing firm's plans, including streamlining the 
     qualified staffing firm's access to the separate line of 
     business rules of section 414(r). The separate line of 
     business rules recognize that if an employer's employees are 
     in multiple lines of businesses, each line of business may 
     have its own competitive pressures, which may, in turn, 
     affect the level of benefits the employer can provide to 
     workers in those lines. Accordingly, the separate line of 
     business rules generally allow an employer that has 
     ``qualified separate lines of businesses'' to apply the 
     IRS coverage and nondiscrimination rules separately to 
     employees in each such lien of business. However, under 
     the existing separate lien of business rules, a number of 
     requirements must be met before an employer can be said to 
     have ``qualified separate lines of business,'' including a 
     requirement that there be at least 50 employees in the 
     line of business, and that the line of business satisfy 
     certain administrative guidelines.
       Section 4(c) of the bill allows automatic separate lien of 
     business treatment for those employees of a qualified 
     staffing firm who are leased employees of a customer, or who 
     would be leased employees of the customer but for the fact 
     that they have not worked the requisite time period under 
     section 414(n)(2)(B). The rationale for this simplified rule 
     is the fact that section 414(n) treats these employees, once 
     they qualify as leased employees, as employees of the 
     customer for IRS coverage and nondiscrimination rules. Under 
     the circumstances, it is inappropriate to require these 
     workers to be counted twice under the coverage and 
     nondiscrimination tests, once by the customer and once by the 
     qualified staffing firm, without affording the qualified 
     staffing firm access to the separate line of business rules. 
     This provision affords comparable treatment in applying the 
     nondiscrimination rules applicable to medical reimbursement 
     plans under section 105(h) and cafeteria plans.
       The bill also provides that if the separate lien of 
     business segment of a qualified staffing firm's plan fails to 
     meet the applicable IRS coverage and nondiscrimination rules, 
     then the effect of disqualification will be confined to that 
     segment of the plan. A special anti-abuse rule is included to 
     make sure that employees who would be treated as highly 
     compensated employees if they were employed by the customer 
     are so treated under the qualified staffing firm's plan.
       Section 5. This provision revises the current safe-harbor 
     rule in section 414(n)(5) which allows a customer to 
     disregard a leased employee for purposes of applying the 
     coverage and nondiscrimination rules to its retirement or 
     401(k) plan if the leased employee is covered under a safe-
     harbor plan, and if leased employees in general comprise less 
     than 20 percent of the customer's rank-and-file work force. 
     The bill amends the requirements which relate to a safe-
     harbor plan to incorporate certain features that have been 
     proposed as part of pension simplification in connection with 
     401(k) safe harbors. Under the new safe-harbor plan 
     requirements, only employees working for the particular 
     customer desiring relief from the leased employee rules would 
     have to be covered by the plan, not all employees of the 
     qualified staffing firm who perform services for customers. 
     The bill also reduces the level of required contribution 
     under a safe-harbor plan from 10 percent to 3 percent. If the 
     safe-harbor plan is a profit-sharing plan, contributions may 
     not be distributed to the employee until the occurrence of an 
     event permitting distribution under the section 401(k) rules, 
     e.g., separation from service. As previously noted, an 
     employee will be treated as having separated from service if 
     the employee ceases to be employed by the qualified staffing 
     firm and becomes employed by the customer.
       Section 5(b) of the bill provides a safe-harbor rule for 
     other employee benefit plans that would allow a customer to 
     disregard leased employees for purposes of applying the 
     coverage and nondiscrimination rules for employee benefit 
     plans referred to in section 414(n)(3)(C) to the extent 
     provided for in Treasury regulations.
       Section 6. This section specifies the effective date of 
     these provisions. Transition relief is afforded for existing 
     plans.

                                H.R. --

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

     SEC. 1. SHORT TITLE.

       This Act may be cited as the ``Staffing Firm Worker 
     Benefits Act of 1996''.

     SEC. 2. CODIFICATION OF EMPLOYER STATUS OF QUALIFIED STAFFING 
                   FIRM FOR EMPLOYMENT TAX PURPOSES.

       (a) Income Tax Withholding.--Section 3401(d) of the 
     Internal Revenue Code is amended--
       (1) in paragraph (1), by striking ``and'' at the end;
       (2) in paragraph (2), by striking the period and inserting 
     ``, and''; and
       (3) by adding at the end the following:
       ``(3) in the case of a qualified staffing firm, described 
     in section 7701(a)(47), paying wages to an individual 
     performing services for a customer of such qualified staffing 
     firm, the term `employer' means such qualified staffing 
     firm.''
       (b) FICA Tax.--Section 3121 of the Internal Revenue Code is 
     amended by adding at the end the following:
       ``(z) Application to Qualified Staffing Firms.--In the case 
     of a qualified staffing firm, described in section 
     7701(a)(47), paying wages to an individual performing 
     services for a customer of such qualified staffing firm, the 
     term `employer' means such qualified staffing firm.''.
       (c) FUTA Tax.--Subsection (a) of section 3306 of the 
     Internal Revenue Code is amended by adding at the end the 
     following:
       ``In the case of a qualified staffing firm, described in 
     section 7701(a)(47), paying wages to an individual performing 
     services for a customer of such qualified staffing firm, the 
     term ``employer'' means such qualified staffing firm.''.
       (d) Definition.--Subsection (a) of section 7701 of the 
     Internal Revenue Code is amended by adding at the end the 
     following paragraph--
       ``(47) Qualified staffing firm.--The term `qualified 
     staffing firm' means any person that is engaged in providing 
     temporary or long-term staffing services to a customer 
     pursuant to a service contract, and that with respect to 
     workers performing services for the customer who are covered 
     by the contract--
       ``(A) Has responsibility for payment of wages to the 
     workers, without regard to the receipt or adequacy of payment 
     from the customer for such services,
       ``(B) Has responsibility for reporting, withholding, and 
     paying any applicable taxes under Chapters 21, 23, and 24, 
     with respect to the workers' wages, without regard to the 
     receipt or adequacy of payment from the customer for such 
     services,
       ``(C) Has responsibility for any worker benefits that may 
     be required by the service contract, without regard to the 
     receipt or adequacy of payment from the customer for such 
     services,
       ``(D) Has authority to hire, reassign, and dismiss the 
     workers and has the contractual right to exercise this 
     authority independent of the customer,
       ``(E) Maintains employee records relating to the workers, 
     and
       ``(F) Has responsibility for addressing the workers' 
     complaints, claims, filings, or requests relating to their 
     employment, except as otherwise provided by existing 
     collective bargaining agreements, if any, notwithstanding 
     that some or all of the actions described in this 
     subparagraph may be shared by the customer.''.

     SEC. 3. CODIFICATION OF EMPLOYER STATUS OF QUALIFIED STAFFING 
                   FIRM FOR PURPOSES OF PROVIDING EMPLOYEE 
                   BENEFITS.

       Paragraph (20) of section 7701(a) of the Internal Revenue 
     Code is amended--
       (a) by redesignating the text of such paragraph as 
     subparagraph (A);
       (b) by adding the heading ``(A) Full-time life insurance 
     salesman.--'' at the start of new subparagraph (A); and
       (c) by adding at the end of paragraph (20) the following:
       ``(B) Individual covered by qualified staffing firm 
     contract.--For the purpose of applying the provisions of 
     section 79 with respect to group-term life insurance 
     purchased for employees, for the purpose of applying the 
     provisions of sections 104, 105, and 106 with respect to 
     accident and health insurance or accident and health plans, 
     for the purpose of applying the provisions of section 101(b) 
     with respect to employees' death benefits, for the purpose of 
     applying the provisions of this title with respect to 
     contributions to or under a trust which is part of a plan 
     described in section 401(a) (other than a defined benefit 
     plan), or to or under a plan described in section 403(a) 
     (other than a defined benefit plan), including for this 
     purpose elective contributions under section 401(k) and 
     employee contributions and matching contributions under 
     section 401(m), with respect to the tax-exempt status of a 
     trust forming a part of such plan, and with respect to 
     distributions under such a plan, or by a trust forming part 
     of such a plan, for the purpose of applying section 125 with 
     respect to cafeteria plans, for the purpose of applying 
     section 127 with respect to educational assistance programs, 
     for the purpose of applying section 129 with respect to 
     dependent

[[Page E1847]]

     care assistance programs, for the purpose of applying the 
     provisions of section 414(n), and for the purpose of applying 
     the provisions listed in section 414(n)(3), with respect to 
     such other benefits, plans, or programs as are described in 
     section 414(n)(3), the term `employee' shall include, with 
     respect to a qualified staffing firm, any individual whose 
     employer is considered to be the qualified staffing firm for 
     the purpose of Chapter 21, 23, and 24. For these purposes, a 
     change in the employment relationship between an individual 
     and a qualified staffing firm or between the individual and a 
     customer or former customer of the qualified staffing firm, 
     as the case may be, whereby the individual becomes or ceases 
     to be an employee of the qualified staffing firm under this 
     subparagraph, shall be treated as the termination of 
     employment and separation from service by the individual from 
     the employment or service of the qualified staffing firm's 
     customer or the qualified staffing firm, as the case may 
     be.''.

     SEC. 4. TREATMENT OF LEASED EMPLOYEES IN EMPLOYEE BENEFIT 
                   PLANS.

       (a) Application of Requirements Concerning Cash or Deferred 
     Arrangements, Matching Contributions, and Employee 
     Contributions to Leased Employees.--Section 414(n)(3)(B) is 
     amended by inserting ``401(k), 401(m)'' before ``408(k)''.
       (b) Permitted Coverage of Leased Employees by Recipient 
     Plan.--Paragraph (6) of section 414(n) of the Internal 
     Revenue Code is renumbered as paragraph (8) and a new 
     paragraph (6) is inserted to read as follows:
       ``(6) Recipient's plan.--
       ``(A) In general.--A recipient may treat a leased employee 
     who is an employee of a qualified staffing firm within the 
     meaning of section 7701(a)(47) as its employee for purposes 
     of providing such individual with employee benefits that are 
     subject to the requirements listed in paragraph (3) or that 
     are described in sections 104, 105, 403(b), 422, and 423. For 
     purposes of the preceding sentence, a `leased employee' 
     includes an individual who would be a leased employee but for 
     the requirements of paragraph (2)(B).
       ``(B) Treatment of covered individuals.--An individual who 
     receives employee benefits pursuant to subparagraph (A) shall 
     be treated as an employee of the recipient for purposes of 
     the provisions of this title that relate to the recipient's 
     contributions or payments with respect to such benefits, the 
     taxation of a trust, if any, providing such benefits, and the 
     taxation of such benefits to the individual.''.
       (v) Special Rules for Leasing Organization's Plan.--Section 
     414(n) is amended by inserting the following as paragraph 
     (7):
       ``(7) Leasing organization's plan.--
       ``(A) Elective disaggregation.--
       ``(i) General Rule.--A leasing organization that is a 
     qualified staffing firm may elect to be treated as operating 
     a separate line of business for purposes of section 414(r), 
     without regard to the requirements of subparagraph (A) and 
     (C) of section 414(r)(2), (I) with respect to those employees 
     who perform services for a recipient and related persons, and 
     who would be treated as leased employees of the recipient by 
     for the requirements of paragraph (2)(B), and (II) with 
     respect to those employees who do not meet the requirements 
     of clause (I) and who perform substantially all their 
     services for the leasing organization. In the event the 
     leasing organization elects under this paragraph (7)(A) to be 
     treated as operating separate lines of business, sections 
     105(h)(3) and (4), 125(c), and 410(b)(5)(B) shall be applied 
     to the relevant plan of the leasing organization by treating 
     the portion of the plan covering employees described in 
     clause (I) as being maintained by the recipient with respect 
     to which the separate line of business relates, and by 
     treating such individuals as employed by the recipient.
       ``(ii) Effect of disqualification.--If the plan of a 
     leasing organization electing under this paragraph (7)(A) 
     fails to satisfy the requirements of section 410(b) or 
     section 401(a)(4), with respect to a separate line of 
     business, only that portion of the plan covering the 
     employees in such line of business shall be disqualified.
       ``(iii) Treatment of related persons.--For purposes of this 
     subparagraph (A), the term ``recipient'' shall not include 
     any person that is a related person with respect to the 
     leasing organization.
       ``(B) Highly compensated employees.--Whether or not the 
     leasing organization makes an election under subparagraph 
     (A), section 414(q) shall be applied to employees of a 
     leasing organization that is a qualified staffing firm by 
     treating the employees who perform services for a recipient 
     or related persons and who would be leased employees of the 
     recipient but for the requirements of paragraph (2)(B) as 
     employed by, and receiving compensation from, the recipient 
     or the related person for purposes of determining whether the 
     employees are highly compensated employees of the leasing 
     organization.''.

     SEC. 5. REVISIONS TO SAFE HARBOR PROVISION.

       (A) Revisions to Safe Harbor Plan Requirements.--
     Subparagraph (B) of section 414(n)(5) of the Internal Revenue 
     Code is amended to read as follows:
       ``(B) Plan Requirements.--A plan meets the requirements of 
     this subparagraph if--
       ``(i) such plan is a money purchase pension plan or a 
     profit-sharing plan, with a nonintegrated employer 
     contribution rate for each participant which is at least 3 
     percent of that portion of the participant's compensation 
     attributable to services performed for the recipient, and 
     which is not dependent on the current or accumulated profits 
     of the leasing organization or on whether the participant 
     makes an elective contribution or employee contribution to 
     such plan,
       ``(ii) such plan provides for full and immediate vesting,
       ``(iii) if the plan is a profit-sharing plan, such plan 
     meets the distribution requirements of section 401(k)(2)(B) 
     with respect to all employer contributions, and
       ``(iv) each employee of the leasing organization who 
     performs services for the recipient immediately participates 
     in such plan.''.
       (b) Extension of Safe Harbor Rule to Additional Employee 
     Benefits.--Paragraph (5) of Section 414(n) of the Internal 
     Revenue Code is amended by adding at the end the following:
       ``(D) Special Rule for Additional Employee Benefits.--To 
     the extent provided for in regulations issued by the 
     Secretary, in the case of a requirement described in 
     subparagraph (C) of paragraph (3), this subsection shall not 
     apply to any leased employee with respect to service 
     performed for a recipient if--
       ``(i) such employee is covered by a plan or an arrangement 
     that is maintained by the leasing organization and that meets 
     such requirements as the Secretary shall prescribe in 
     regulations, and
       ``(ii) leased employees (determined without regard to this 
     paragraph) do not constitute more than 20 percent of the 
     recipient's nonhighly compensated work force.''.

     SEC. 6. EFFECTIVE DATE.

       The amendments made by this Act shall take effect on the 
     date of the enactment of this Act. In the case of a plan that 
     covers employees who are providing services for a customer 
     pursuant to a contract between a qualified staffing firm and 
     the customer, and that was adopted and in effect before the 
     date of enactment of this Act, such amendments shall not take 
     effect until the first day of the first plan year that begins 
     after the date of enactment of this Act, and the plan shall 
     not be required to be amended to reflect this Act until the 
     end of such plan year.

                          ____________________