[Congressional Record Volume 149, Number 88 (Monday, June 16, 2003)]
[Senate]
[Pages S7927-S7931]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRASSLEY:
  S. 1269. 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; to the Committee on Finance.
  Mr. GRASSLEY. Mr. President, today I am reintroducing the 
Professional Employer Organization Workers Benefits Act of 2003--
legislation that I sponsored in the last Congress. This legislation 
clarifies certain tax rules

[[Page S7928]]

for Professional Employer Organizations, PEOs, and will allow PEOs to 
provide retirement and health benefits for workers at small and medium-
sized businesses. By eliminating uncertainty in the current rules, it 
will also improve the administration of our tax system.
  The PEO legislation makes it clear that a PEO that is certified by 
the IRS as meeting certain rigorous standards will be able to offer 
employee benefits and remit Federal employment taxes for workers 
performing services for the PEO's business customers. The bill has won 
the support of representatives of the small business community, 
including the National Federation of Independent Business (NFIB), and 
has been endorsed by an array of employee benefits experts, such as the 
American Benefits Council, ABC, the American Society of Pension 
Actuaries, ASPA, and the Employers Council on Flexible Compensation, 
ECFC. The legislation also has the support of the National Association 
of Professional Employer Organizations, NAPEO--the largest organization 
representing the interests of PEOs. Significantly, then-Internal 
Revenue Service Commissioner Rossotti stated last year that the IRS 
believes that the PEO bill could provide useful clarification of the 
federal employment tax and employee benefits obligations of PEOs and 
their clients.
  A well-run PEO provides the expertise and the economies of scale 
necessary to provide health, retirement and other services to small 
businesses in an affordable and efficient manner. For many of these 
workers, the PEO's pension or health plan represents benefits that the 
worker would not have received from the small business directly because 
they were too costly for the small business to afford on its own.
  We must take every opportunity to encourage businesses to provide 
retirement and health benefits to their employees through whatever 
means possible. PEOs offer one creative way to bridge the gap between 
what workers need and what small businesses can afford to provide them. 
For example, Merit Resources, based in Iowa, is a PEO that has provided 
important benefits to many workers in my state. The clarifications 
provided in the bill I am introducing today would provide PEOs like 
Merit with the certainty they need. Certainty that will ensure that 
they can continue to serve small businesses and provide benefits to the 
workers at those businesses.
  I look forward to working with the Administration and my colleagues, 
on both sides of the aisle, on these important issues. I ask unanimous 
consent that the text of the bill be printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1269

       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

[[Page S7929]]

     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.--

[[Page S7930]]

       ``(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,

[[Page S7931]]

       ``(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)).
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