4.4 Service Across Employers: Predecessor Employers, M&A Transitions, Leased Employees & Independent Contractors

The Boundary Problem

Every eligibility calculation starts with a deceptively simple question: whose service counts, and who even is an employee? In a single-entity plan with a stable workforce this is trivial. In the real world — and on the QKA-1 exam — plans absorb acquired workforces, rent staff from leasing organizations, and pay workers on Form 1099 who look a great deal like employees. Each situation has its own statutory rule.

Predecessor Employer Service: IRC §414(a)

IRC §414(a)(1) contains a mandatory rule and the plan document contains an elective one:

"Maintains the plan of a predecessor" means the successor continued the actual plan — typically through a merger of the predecessor's plan into the buyer's plan, or by assuming sponsorship of it. If the buyer instead lets the seller terminate its plan and simply hires the workforce, no statutory crediting is required.

Exam framing: the question usually gives a stock purchase versus an asset purchase. In a stock purchase the acquired entity (and its plan) comes along, so the plan is generally maintained and service is credited. In an asset purchase the buyer typically hires employees fresh, so predecessor service is credited only if the document says so.

The M&A Transition Rule: IRC §410(b)(6)(C)

When a stock or asset acquisition changes the members of a controlled group, the plans of each side would immediately have to satisfy IRC §410(b) against the combined workforce. Congress supplied breathing room.

The transition period begins on the date of the transaction and ends on the last day of the first plan year beginning after the date of the transaction. For a calendar-year plan acquired on March 1, 2026, the transition period runs from March 1, 2026 through December 31, 2027 — nearly two full years.

Two prerequisites must hold for the entire period:

1. The plan satisfied coverage immediately before the transaction.
2. No significant change in plan coverage or benefits occurs during the transition period other than the change caused by the transaction itself.

Amending the acquired group into or out of the plan mid-transition is the classic way sponsors accidentally forfeit the relief. During the transition period the plan is deemed to satisfy coverage; the day the period ends, the combined controlled group must pass on its own.

Leased Employees: IRC §414(n)

A leased employee is a person who is not the recipient's common-law employee but who:

1. Provides services under an agreement between the recipient and a leasing organization;
2. Has performed those services on a substantially full-time basis for at least one year; and
3. Performs services under the primary direction or control of the recipient.

All three prongs must be met. "Substantially full time" is generally 1,500 hours or 75% of the hours customarily performed in that position. The third prong — primary direction or control — was added by SBJPA 1996 and replaced the older "historically performed" test; it is the prong exam questions most often turn on.

Consequence: a leased employee is treated as an employee of the recipient for eligibility, vesting, coverage under §410(b), nondiscrimination, top-heavy, and the §415 limits. Contributions the leasing organization makes for the worker are treated as made by the recipient.

The 10% Safe Harbor — IRC §414(n)(5)

A recipient may disregard leased employees entirely only if both conditions hold:

• Leased employees constitute no more than 20% of the recipient's non-highly compensated workforce; and
• The leasing organization maintains a money purchase pension plan for each covered worker with a nonintegrated employer contribution of at least 10% of compensation, immediate participation, and full and immediate vesting.

Miss either condition and the leased employees must be counted. Candidates routinely misremember the contribution level as 3% or 5%; it is 10%, nonintegrated, in a money purchase plan.

Independent Contractors: A Classification Risk, Not a Plan Rule

There is no statutory "independent contractor exclusion." A worker is either a common-law employee — controlled by the employer as to what is done and how it is done — or an independent contractor. A plan may exclude "individuals treated by the employer as independent contractors," and most pre-approved documents include exactly that language, but the exclusion does not survive an IRS reclassification.

If the IRS reclassifies a group of 1099 workers as common-law employees:

• They were eligible employees all along;
• They belong in the §410(b) testing group for those years, usually as non-benefiting NHCEs, which can retroactively break coverage;
• They may be owed missed deferral opportunity and missed employer contributions, corrected under EPCRS.

The classic Vizcaino v. Microsoft fact pattern is the reason well-drafted documents phrase the exclusion by reference to how the employer treats the worker rather than by the worker's true legal status.

Comparative Summary

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Common ASPPA QKA Exam Traps

• Trap 1 — The 10% safe harbor details. It requires a money purchase plan, 10% nonintegrated, immediate vesting and immediate participation, and the 20% workforce cap. Answer choices that state only one or two conditions are wrong.
• Trap 2 — Transition period length. It ends on the last day of the first plan year beginning after the transaction, not one year after the transaction.
• Trap 3 — Predecessor service. Mandatory only when the successor maintains the predecessor's plan; otherwise it is a document election.
• Trap 4 — Leased employee one-year requirement. The worker must have performed services for at least one year; a six-month engagement never creates a leased employee.
• Trap 5 — Amending during the transition period. A significant coverage change during the period destroys the relief retroactively.