This article by Reish, Luftman, McDaniel & Reicher highlights one of the problem areas for plan administration: “What Difference Does It Make If I Hire a Former “Leased” Employee?” Hiring “leased” employees can lead to plan compliance violations since employers are required by IRS rules to credit service for purposes of eligibility and vesting back to the date the “leased” employee began work for the employer as a “leased” employee, i.e. you cannot begin crediting service as of the date of hire as a “regular employee.” One of the problems with this requirement is the record-keeping involved. Many employers simply do not keep records of service for their “leased” employees, rather the vendors have these records, which are often difficult to obtain. If an employer is audited by the IRS where this problem is discovered, the employer would likely be required to give the affected employees the benefits (adjusted for earnings) and vesting credit they would have received if they had been correctly credited with their service as “leased” employees. The employer would have to reconstruct records as far as possible and provide the service crediting that is required under the rules.
In the case highlighted in the article, the employer, with the help of legal counsel, most likely utilized the IRS’s Employee Plans Compliance Resolution System (under which an employer can voluntarily submit a plan to the IRS which has compliance violations, correct those violations, pay a minimum sanction, and obtain approval for the correction from the IRS) and was able to come up with what could be termed an “educated guesstimate” which satisfied the IRS, even though the employer did not have records for the service.