I

108TH CONGRESS

1ST SESSION H. R. 2178

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 HOUSE OF REPRESENTATIVES

MAY 21, 2003

Mr. PORTMAN (for himself and Mr. CARDIN) introduced the following bill;

which was referred to the Committee on Ways and Means

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.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Professional Employer

5 Organization Workers Benefits Act of 2003’’.

6 SEC. 2. NO INFERENCE.

7 Nothing contained in this Act or the amendments

8 made by this Act shall be construed to create any infer-
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1 ence with respect to the determination of who is an em2 ployee or employer—

3 (1) for Federal tax purposes (other than the

4 purposes set forth in the amendments made by sec5 tion 3), or

6 (2) for purposes of any other provision of law.

7 SEC. 3. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZA8 TIONS.

9 (a) EMPLOYMENT TAXES.—Chapter 25 of the Inter10 nal Revenue Code of 1986 (relating to general provisions

11 relating to employment taxes) is amended by adding at

12 the end the following new section:

13 ‘‘SEC. 3511. CERTIFIED PROFESSIONAL EMPLOYER ORGANI14 ZATIONS.

15 ‘‘(a) GENERAL RULES.—For purposes of the taxes

16 imposed by this subtitle—

17 ‘‘(1) a certified professional employer organiza18 tion shall be treated as the employer (and no other

19 person shall be treated as the employer) of any work

20 site employee performing services for any customer

21 of such organization, but only with respect to remu22 neration remitted by such organization to such work

23 site employee, and
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1 ‘‘(2) the exemptions and exclusions which would

2 (but for paragraph (1)) apply shall apply with re3 spect to such taxes imposed on such remuneration.

4 ‘‘(b) SUCCESSOR EMPLOYER STATUS.—For purposes

5 of sections 3121(a) and 3306(b)(1)—

6 ‘‘(1) a certified professional employer organiza7 tion entering into a service contract with a customer

8 with respect to a work site employee shall be treated

9 as a successor employer and the customer shall be

10 treated as a predecessor employer, and

11 ‘‘(2) a customer whose service contract with a

12 certified professional employer organization is termi13 nated with respect to a work site employee shall be

14 treated as a successor employer and the certified

15 professional employer organization shall be treated

16 as a predecessor employer.

17 ‘‘(c) LIABILITY WITH RESPECT TO INDIVIDUALS

18 PURPORTED TO BE WORK SITE EMPLOYEES.—

19 ‘‘(1) GENERAL RULES.—Solely for purposes of

20 its liability for the taxes imposed by this subtitle—

21 ‘‘(A) the certified professional employer or22 ganization shall be treated as the employer of

23 any individual (other than a work site employee

24 or a person described in subsection (e)) who is

25 performing services covered by a contract meet-
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1 ing the requirements of section 7705(e)(2)(F),

2 but only with respect to remuneration remitted

3 by such organization to such individual, and

4 ‘‘(B) the exemptions and exclusions which

5 would (but for subparagraph (A)) apply shall

6 apply with respect to such taxes imposed on

7 such remuneration.

8 ‘‘(d) SPECIAL RULE FOR RELATED PARTY.—Sub9 section (a) shall not apply in the case of a customer which

10 bears a relationship to a certified professional employer

11 organization described in section 267(b) or 707(b). For

12 purposes of the preceding sentence, such sections shall be

13 applied by substituting ‘10 percent’ for ‘50 percent’.

14 ‘‘(e) SPECIAL RULE FOR CERTAIN INDIVIDUALS.—

15 For purposes of the taxes imposed under this subtitle, an

16 individual with net earnings from self-employment derived

17 from the customer’s trade or business (including a partner

18 in a partnership that is a customer), is not a work site

19 employee with respect to remuneration paid by a certified

20 professional employer organization.

21 ‘‘(f) REGULATIONS.—The Secretary shall prescribe

22 such regulations as may be necessary or appropriate to

23 carry out the purposes of this section.’’.
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1 (b) EMPLOYEE BENEFITS.—Section 414 of such

2 Code (relating to definitions and special rules) is amended

3 by adding at the end the following new subsection:

4 ‘‘(w) CERTIFIED PROFESSIONAL EMPLOYER ORGANI5 ZATIONS.—

6 ‘‘(1) PLANS MAINTAINED BY CERTIFIED PRO7 FESSIONAL EMPLOYER ORGANIZATIONS.—

8 ‘‘(A) IN GENERAL.—Except as otherwise

9 provided in this subsection, in the case of a

10 plan or program established or maintained by a

11 certified professional employer organization to

12 provide employee benefits to work site employ13 ees, then, for purposes of applying the provi14 sions of this title applicable to such benefits—

15 ‘‘(i) such plan shall be treated as a

16 single employer plan established and main17 tained by the organization,

18 ‘‘(ii) the organization shall be treated

19 as the employer of the work site employees

20 eligible to participate in the plan, and

21 ‘‘(iii) the portion of such plan covering

22 work site employees shall not be taken into

23 account in applying such provisions to the

24 remaining portion of such plan or to any

25 other plan established or maintained by
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1 the certified professional employer organi2 zation providing employee benefits (other

3 than to work site employees).

4 ‘‘(B) SPECIAL EXCEPTIONS IN APPLYING

5 RULES TO BENEFITS.—

6 ‘‘(i) IN GENERAL.—In applying any

7 requirement listed in clause (iii) to a plan

8 or program established by the certified

9 professional employer organization—

10 ‘‘(I) the portion of the plan es11 tablished by the certified professional

12 employer organization which covers

13 work site employees performing serv14 ices for a customer shall be treated as

15 a separate plan of the customer (in16 cluding for purposes of any disquali17 fication or correction),

18 ‘‘(II) the customer shall be treat19 ed as establishing and maintaining

20 the plan, as the employer of such em21 ployees, and as having paid any com22 pensation remitted by the certified

23 professional employer organization to

24 such employees under the service con-
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1 tract entered into under section 7705,

2 and

3 ‘‘(III) a controlled group that in4 cludes a certified professional em5 ployer organization shall not include

6 in the controlled group any work site

7 employees performing services for a

8 customer.

9 For purposes of subclause (III), all persons

10 treated as a single employer under sub11 sections (b), (c), (m), and (o) shall be

12 treated as members of the same controlled

13 group.

14 ‘‘(ii) SELF-EMPLOYED INDIVID15 UALS.—A work site employee who would

16 be treated as a self-employed individual (as

17 defined in section 401(c)(1)), a disqualified

18 person (as defined in section 4975(e)(2)),

19 a 2-percent shareholder (as defined in sec20 tion 1372(b)(2)), or a shareholder-em21 ployee (as defined in section

22 4975(f)(6)(C)), but for the relationship

23 with the certified professional employer or24 ganization, shall be treated as a self-em25 ployed individual, disqualified person, a 2-
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1 percent shareholder, or shareholder-em2 ployee for purposes of rules applicable to

3 employee benefit plans maintained by such

4 certified professional employer organiza5 tion.

6 ‘‘(iii) LISTED REQUIREMENTS.—The

7 requirements listed in this clause are:

8 ‘‘(I) NONDISCRIMINATION AND

9 QUALIFICATION.—Sections 79(d),

10 105(h), 125(b), 127(b)(2) and (3),

11 129(d)(2), (3), (4), and (5), 132(j)(1),

12 274(j)(3)(B), 401(a)(4), 401(a)(17),

13 401(a)(26), 401(k)(3) and (12),

14 401(m)(2) and (11), 404 (in the case

15 of a plan subject to section 412),

16 410(b), 412, 414(q), 415, 416, 419,

17 422, 423(b), 505(b), 4971, 4972,

18 4975, 4976, 4978, and 4979.

19 ‘‘(II) SIZE.—Sections 220,

20 401(k)(11), 401(m)(10), 408(k), and

21 408(p).

22 ‘‘(III) ELIGIBILITY.—Section

23 401(k)(4)(B).
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1 ‘‘(IV) AUTHORITY.—Such other

2 similar requirements as the Secretary

3 may prescribe.

4 ‘‘(iv) WELFARE BENEFIT FUNDS.—

5 With respect to a welfare benefit fund

6 maintained by a certified professional em7 ployer organization for the benefit of work

8 site employees performing services for a

9 customer, section 419 shall be treated as

10 not listed in clause (iii)(I) if the fund pro11 vides only 1 or more of the following:

12 ‘‘(I) Medical benefits other than

13 retiree medical benefits.

14 ‘‘(II) Disability benefits.

15 ‘‘(III) Group term life insurance

16 benefits which do not provide for any

17 cash surrender value or other money

18 that can be paid, assigned, borrowed

19 or pledged for collateral for a loan.

20 ‘‘(v) EXCISE TAXES.—Notwith21 standing clause (iii), the certified profes22 sional employer organization and the cus23 tomer contracting for work site employees

24 to pay services shall be jointly and sever25 ally liable for the tax imposed by section
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1 4971 with respect to failure to meet the

2 minimum funding requirements and the

3 tax imposed by section 4976 with respect

4 to funded welfare benefit plans.

5 ‘‘(vi) CONTINUATION COVERAGE RE6 QUIREMENTS.—For purposes of applying

7 the provisions of section 4980B with re8 spect to a group health plan maintained by

9 a certified professional employer organiza10 tion for the benefit of work site employees:

11 ‘‘(I) TERMINATION OF EMPLOY12 MENT EVENTS.—Each of the following

13 events shall constitute a termination

14 of employment of a work site em15 ployee for purposes of section

16 4980B(f)(3)(B):

17 ‘‘(aa) The work site em18 ployee ceasing to provide services

19 to any customer of such certified

20 professional employer organiza21 tion.

22 ‘‘(bb) The work site em23 ployee ceasing to provide services

24 to one customer of such certified

25 professional employer organiza-
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1 tion and becoming a work site

2 employee with respect to another

3 customer of such certified profes4 sional employer organization; and

5 ‘‘(cc) The termination of a

6 service contract between the cer7 tified professional employer orga8 nization and the customer with

9 respect to which the work site

10 employee performs services, pro11 vided, however, that such a con12 tract termination shall not con13 stitute a termination of employ14 ment under section

15 4980B(f)(3)(B) for such work

16 site employee if, at the time of

17 such contract termination, such

18 customer maintains a group

19 health plan (other than a plan

20 providing only excepted benefits

21 within the meaning of sections

22 9831 and 9832 or a plan cov23 ering less than two participants

24 who are employees).
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1 ‘‘(II) TERMINATION EVENT CON2 STITUTING A QUALIFYING EVENT.—If

3 an event described in subparagraph

4 (vi)(I) also constitutes a qualifying

5 event under section 4980B(f)(3) with

6 respect to the group health plan main7 tained by the certified professional

8 employer organization for the affected

9 work site employee, such plan shall no

10 longer be required to provide continu11 ation coverage as of any new coverage

12 date.

13 ‘‘(III) NEW COVERAGE DATE

14 WHEN TERMINATION EVENT CON15 STITUTES QUALIFYING EVENT.—For

16 purposes of subclause (II), a new cov17 erage date shall be the first date on

18 which—

19 ‘‘(aa) the customer main20 tains a group health plan other

21 than a plan described in section

22 4980B(d), a plan providing only

23 excepted benefits within the

24 meaning of sections 9831 and

25 9832, or a plan covering less
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1 than two participants who are

2 employees, or

3 ‘‘(bb) a service contract be4 tween such customer and another

5 certified professional employee

6 organization becomes effective

7 under which worksite employees

8 performing services for such cus9 tomer are covered under a group

10 health plan of such other cer11 tified professional employee orga12 nization, other than a plan de13 scribed in section 4980B(d), a

14 plan providing only excepted ben15 efits within the meaning of sec16 tions 9831 and 9832, or a plan

17 covering less than two partici18 pants who are employees.

19 ‘‘(IV) EFFECT OF CUSTOMER20 MAINTAINED PLAN.—As of a new cov21 erage date described in subclause

22 (III)(aa), the customer shall be re23 quired to make continuation coverage

24 available to any qualified beneficiary

25 who was receiving (or was eligible to
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1 elect to receive) continuation coverage

2 under a certified professional em3 ployer organization’s group health

4 plan and who is, or whose qualifying

5 event occurred in connection with, a

6 person whose last employment prior to

7 such employee’s qualifying event was

8 as a work site employee providing

9 services to such customer pursuant to

10 a service contract with such certified

11 professional employer organization.

12 ‘‘(C) EFFECT OF NEW SERVICE CONTRACT

13 WITH CERTIFIED PEO.—As of a new coverage

14 date described in subclause (III)(bb), the sec15 ond certified professional employee organization

16 shall be required to make continuation coverage

17 available to any qualified beneficiary who was

18 receiving (or was eligible to elect to receive)

19 continuation coverage under the first certified

20 professional employer organization’s group

21 health plan and who is, or whose qualifying

22 event occurred in connection with, a person

23 whose last employment prior to such employee’s

24 qualifying event was as a work site employee

25 providing services to the customer pursuant to
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1 a service contract with the first certified profes2 sional employer organization.

3 ‘‘(vii) CONTINUED COVERAGE FOR

4 QUALIFIED BENEFICIARIES.—As of the

5 date that a certified professional employee

6 organization’s group health plan first pro7 vides coverage to one or more work site

8 employees providing services to a customer,

9 such group health plan shall be required to

10 make continuation coverage available to

11 any qualified beneficiary who was receiving

12 (or was eligible to receive or elect to re13 ceive) continuation coverage under a group

14 health plan sponsored by such customer if,

15 in connection with coverage being provided

16 by the organization’s plan, such customer

17 terminates each of its group health plans,

18 other than a plan or plans providing only

19 excepted benefits within the meaning of

20 sections 9831 and 9832 or covering less

21 than two participants who are employees.

22 ‘‘(viii) EFFECT OF TERMINATION OF

23 PEO STATUS.—The termination of a pro24 fessional employer organization’s status as
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1 a certified professional employer

2 organization—

3 ‘‘(I) shall constitute an event de4 scribed in section 4980B(f)(3)(B) for

5 any work site employee performing

6 services pursuant to a contract be7 tween a customer and such profes8 sional employer organization, but

9 ‘‘(II) no loss of coverage within

10 the meaning of section 4980B(f)(3)

11 occurs unless, in connection with such

12 termination of status as a certified

13 professional employer organization,

14 the individual formerly treated as a

15 work site employee performing serv16 ices for the customer pursuant to a

17 contract with such professional em18 ployer organization ceases to be cov19 ered under the arrangement of the

20 professional employer organization

21 that had been, prior to such termi22 nation of status, the group health

23 plan of such organization.

24 ‘‘(ix) PERSON LIABLE FOR TAX.—For

25 purposes of the liability for tax under sec-
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1 tion 4980B, the person or entity required

2 to provide continuation coverage under this

3 clause (vi) shall be deemed to be the em4 ployer under section 4980B(e)(1)(A).

5 ‘‘(2) PLANS MAINTAINED BY CUSTOMERS OF

6 CERTIFIED PROFESSIONAL EMPLOYER ORGANIZA7 TIONS.—If a customer of a certified professional em8 ployer organization provides (other than through

9 such organization) any employee benefits, then with

10 respect to such benefits—

11 ‘‘(A) work site employees of the organiza12 tion who perform services for the customer shall

13 be treated as leased employees of such cus14 tomer,

15 ‘‘(B) such customer shall be treated as a

16 recipient for purposes of subsection (n), and

17 paragraphs (4) and (5) of subsection (n) shall

18 not apply for such purposes, and

19 ‘‘(C) with respect to such work site em20 ployees, sections 105(h), 403(b)(12), 422, and

21 423 shall be treated as a benefit listed in sub22 section (n)(3)(C).

23 ‘‘(3) PLANS MAINTAINED BY COMPANIES IN

24 SAME CONTROLLED GROUP AS CERTIFIED PROFES25 SIONAL EMPLOYER ORGANIZATION.—In applying any
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1 requirement listed in paragraph (1)(B)(iii), a con2 trolled group which includes a certified professional

3 employer organization shall not include in such con4 trolled group any work site employees performing

5 services for a customer. For purposes of this para6 graph, all persons treated as a single employer

7 under subsections (b), (c), (m) and (o) shall be

8 treated as members of the same controlled group.

9 ‘‘(4) RULES APPLICABLE TO PLANS MAIN10 TAINED BY CERTIFIED PROFESSIONAL EMPLOYER

11 ORGANIZATIONS AND PLANS MAINTAINED BY THEIR

12 CUSTOMERS.—

13 ‘‘(A) SERVICE CREDITING FOR PARTICIPA14 TION AND VESTING PURPOSES.—In the case of

15 a plan maintained by a certified professional

16 employer organization or a customer, for pur17 poses of determining a work site employee’s

18 service for eligibility to participate and vesting

19 under sections 410(a) and 411, rules similar to

20 the rules of paragraphs (1) and (3) of section

21 413(c) shall apply to service for the certified

22 professional employer organization and cus23 tomer.

24 ‘‘(B) COMPENSATION.—
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1 ‘‘(i) IN GENERAL.—Except as pro2 vided in clause (ii), for purposes of sub3 section (s) and section 415(c)(3), or other

4 comparable provisions of this title based on

5 compensation which affects employee ben6 efit plans, compensation received from the

7 customer with respect to which the work

8 site employee performs services shall be

9 taken into account together with com10 pensation received from the certified pro11 fessional employer organization.

12 ‘‘(ii) EXCEPTION.—For purposes of

13 applying sections 404 and 412 to a plan

14 maintained by a certified professional em15 ployer organization, only compensation re16 ceived from the certified professional em17 ployer organization shall be taken into ac18 count.

19 ‘‘(C) ELIGIBLE EMPLOYERS.—The provi20 sions of sections 457(f)(1)(A) and (B) apply to

21 a work site employee performing services for a

22 customer that is an eligible employer as defined

23 in section 457(e)(1). The preceding sentence

24 shall not apply in the case of a plan described

25 in section 401(a) which includes a trust exempt
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1 from tax under section 501(a), an annuity plan

2 or contract described in section 403, the portion

3 of a plan which consists of a transfer of prop4 erty described in section 83, the portion of a

5 plan which consists of a trust to which section

6 402(b) applies, or a qualified governmental ex7 cess benefit arrangement described in section

8 415(m).

9 ‘‘(5) SPECIAL RULES WHERE MULTIPLE

10 PLANS.—

11 ‘‘(A) IN GENERAL.—For purposes of ap12 plying section 415 with respect to a plan main13 tained by a certified professional employer orga14 nization, the organization and customers of

15 such organization shall be treated as a single

16 employer, except that if plans are maintained

17 by a certified professional employer organiza18 tion and a customer with respect to a work site

19 employee, any action required to be taken by

20 such plans shall be taken first with respect to

21 the plan maintained by the customer.

22 ‘‘(B) MINIMUM BENEFIT.—If a minimum

23 benefit is required to be provided under section

24 416, such benefit shall, to the extent possible,
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1 be provided through the plan maintained by the

2 certified professional employer organization.

3 ‘‘(6) TERMINATION OF SERVICE CONTRACT BE4 TWEEN CERTIFIED PROFESSIONAL EMPLOYER ORGA5 NIZATION AND CUSTOMER.—

6 ‘‘(A) IN GENERAL.—

7 ‘‘(i) TREATMENT OF SUCCESSOR

8 PLAN.—If a service contract between a

9 customer and a certified professional em10 ployer organization is terminated and work

11 site employees of the customer were cov12 ered by a plan maintained by the organiza13 tion, then, except as provided in regula14 tions, any plan of another certified profes15 sional employer organization or the cus16 tomer which covers such work site employ17 ees shall be treated as a successor plan for

18 purposes of any rules governing in-service

19 distributions.

20 ‘‘(ii) TREATMENT AS SEVERANCE

21 FROM EMPLOYMENT AND SEPARATION

22 FROM SERVICE.—If a service contract be23 tween a customer and a certified profes24 sional employer organization is terminated,

25 and there is no plan treated as a successor
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1 plan under clause (i), then such termi2 nation shall be treated as a plan termi3 nation with respect to each work site em4 ployee of such customer.

5 ‘‘(B) DISTRIBUTION RULES APPLICABLE

6 TO SUBPARAGRAPH (A)(ii).—Except as other7 wise required by this title, in any case to which

8 subparagraph (A)(ii) applies, the certified pro9 fessional employer organization plan may

10 distribute—

11 ‘‘(i) during the 2-year period begin12 ning on the date of such termination (in

13 accordance with plan terms) only—

14 ‘‘(I) elective deferrals and earn15 ings attributable thereto,

16 ‘‘(II) qualified nonelective con17 tributions (within the meaning of sec18 tion 401(m)(4)(C)) and earnings at19 tributable thereto, and

20 ‘‘(III) matching contributions de21 scribed in section 401(k)(3)(D)(ii)(I)

22 and earnings attributable thereto,

23 of former work site employees associated

24 with the terminated customer only in a di-
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1 rect rollover described in section

2 401(a)(31), and

3 ‘‘(ii) after such 2-year period,

4 amounts in such plan in accordance with

5 plan terms.’’.

6 (c) CERTIFIED PROFESSIONAL EMPLOYER ORGANI7 ZATION DEFINED.—Chapter 79 of such Code (relating to

8 definitions) is amended by adding at the end the following

9 new section:

10 ‘‘SEC. 7705. CERTIFIED PROFESSIONAL EMPLOYER ORGANI11 ZATIONS.

12 ‘‘(a) IN GENERAL.—For purposes of this title, the

13 term ‘certified professional employer organization’ means

14 a person who applies to be treated as a certified profes15 sional employer organization for purposes of sections

16 414(w) and 3511 and who has been certified by the Sec17 retary as meeting the requirements of subsection (b).

18 ‘‘(b) CERTIFICATION.—A person meets the require19 ments of this subsection if such person—

20 ‘‘(1) demonstrates that such person (and any

21 owner, officer, and such other persons as may be

22 specified in regulations) meets such requirements as

23 the Secretary shall establish with respect to tax sta24 tus, background, experience, business location, and

25 annual financial audits,
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1 ‘‘(2) represents that it will satisfy the bond and

2 independent financial review requirements of sub3 sections (c) on an ongoing basis,

4 ‘‘(3) represents that it will satisfy such report5 ing obligations as may be imposed by the Secretary,

6 ‘‘(4) represents that it will maintain a qualified

7 plan (as defined in section 408(p)(2)(D)(ii)) or an

8 arrangement to provide simple retirement accounts

9 (within the meaning of section 408(p)) which benefit

10 at least 95 percent of all work site employees who

11 are not highly compensated employees for purposes

12 of section 414(q),

13 ‘‘(5) computes its taxable income using an ac14 crual method of accounting unless the Secretary ap15 proves another method,

16 ‘‘(6) agrees to verify the continuing accuracy of

17 representations and information which was pre18 viously provided on such periodic basis as the Sec19 retary may prescribe, and

20 ‘‘(7) agrees to notify the Secretary in writing of

21 any change that materially affects the continuing ac22 curacy of any representation or information which

23 was previously made or provided.

24 ‘‘(c) REQUIREMENTS.—
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1 ‘‘(1) IN GENERAL.—An organization meets the

2 requirements of this paragraph if such

3 organization—

4 ‘‘(A) meets the bond requirements of sub5 paragraph (2), and

6 ‘‘(B) meets the independent financial re7 view requirements of subparagraph (3).

8 ‘‘(2) BOND.—

9 ‘‘(A) IN GENERAL.—A certified profes10 sional employer organization meets the require11 ments of this paragraph if the organization has

12 posted a bond for the payment of taxes under

13 subtitle C (in a form acceptable to the Sec14 retary) that is in an amount at least equal to

15 the amount specified in subparagraph (B).

16 ‘‘(B) AMOUNT OF BOND.—

17 ‘‘(i) IN GENERAL.—For the period

18 April 1 of any calendar year through

19 March 31 of the following calendar year,

20 the amount of the bond required is equal

21 to the greater of:

22 ‘‘(I) 5 percent of the organiza23 tion’s liability for taxes imposed by

24 this subtitle during the preceding cal-
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1 endar year (but not to exceed

2 $1,000,000), or

3 ‘‘(II) $50,000.

4 ‘‘(ii) SPECIAL RULE FOR NEWLY CRE5 ATED PROFESSIONAL EMPLOYER ORGANI6 ZATIONS.—During the first three full cal7 endar years that an organization is in ex8 istence, subclause (I) of clause (i) shall not

9 apply. For this purpose—

10 ‘‘(I) under rules provided by the

11 Secretary, an organization is treated

12 as in existence as of the date that

13 such organization began providing

14 services to any client which were com15 parable to the services being provided

16 with respect to worksite employees,

17 regardless of whether such date oc18 curred before or after the organization

19 is certified under section 7705, and

20 ‘‘(II) an organization with liabil21 ity for taxes imposed by this subtitle

22 during the preceding calendar year in

23 excess of $5,000,000 shall no longer

24 be described in this clause (ii) as of
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1 April 1 of the year following such cal2 endar year.

3 ‘‘(3) INDEPENDENT FINANCIAL REVIEW RE4 QUIREMENTS.—A certified professional employer or5 ganization meets the requirements of this subpara6 graph if such organization—

7 ‘‘(A) has, as of the most recent audit date,

8 caused to be prepared and provided to the Sec9 retary (in such manner as the Secretary may

10 prescribe) an opinion of an independent cer11 tified public accountant as to whether the cer12 tified professional employer organization’s fi13 nancial statements are presented fairly in ac14 cordance with generally accepted accounting

15 principles, and

16 ‘‘(B) provides to the Secretary an assertion

17 regarding Federal employment tax payments

18 and an examination level attestation on such

19 assertion from an independent certified public

20 accountant not later than the last day of the

21 second month beginning after the end of each

22 calendar quarter. Such assertion shall state

23 that the organization has withheld and made

24 deposits of all taxes imposed by chapters 21,

25 22, and 24 of the Internal Revenue Code in ac-
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1 cordance with regulations imposed by the Sec2 retary for such calendar quarter and such ex3 amination level attestation shall state that such

4 assertion is fairly stated, in all material re5 spects.

6 ‘‘(4) SPECIAL RULE FOR SMALL CERTIFIED

7 PROFESSIONAL EMPLOYER ORGANIZATIONS.—The

8 requirements of paragraph (3)(A) shall not apply

9 with respect to a fiscal year of an organization if

10 such organization’s liability for taxes imposed by

11 subtitle C during the calendar year ending on (or

12 concurrent with) the end of the fiscal year were

13 $5,000,000 or less.

14 ‘‘(5) FAILURE TO FILE ASSERTION AND ATTES15 TATION.—If the certified professional employer orga16 nization fails to file the assertion and attestation re17 quired by paragraph (3) with respect to a particular

18 quarter, then the requirements of paragraph (3)

19 with respect to such failure shall be treated as not

20 satisfied for the period beginning on the due date for

21 such attestation.

22 ‘‘(6) AUDIT DATE.—For purposes of paragraph

23 (3)(A), the audit date shall be six months after the

24 completion of the organization’s fiscal year.
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1 ‘‘(d) SUSPENSION AND REVOCATION AUTHORITY.—

2 The Secretary may suspend or revoke a certification of

3 any person under subsection (b) for purposes of section

4 414(w) or 3511, or both, if the Secretary determines that

5 such person is not satisfying the representations or re6 quirements of subsections (b) or (c), or fails to satisfy ap7 plicable accounting, reporting, payment, or deposit re8 quirements.

9 ‘‘(e) WORK SITE EMPLOYEE.—For purposes of this

10 title—

11 ‘‘(1) IN GENERAL.—The term ‘work site em12 ployee’ means, with respect to a certified profes13 sional employer organization, an individual who—

14 ‘‘(A) performs services for a customer pur15 suant to a contract which is between such cus16 tomer and the certified professional employer

17 organization and which meets the requirements

18 of paragraph (2), and

19 ‘‘(B) performs services at a work site

20 meeting the requirements of paragraph (3).

21 ‘‘(2) SERVICE CONTRACT REQUIREMENTS.—A

22 contract meets the requirements of this paragraph

23 with respect to an individual performing services for

24 a customer if such contract is in writing and pro-
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1 vides that the certified professional employer organi2 zation shall—

3 ‘‘(A) assume responsibility for payment of

4 wages to the individual, without regard to the

5 receipt or adequacy of payment from the cus6 tomer for such services,

7 ‘‘(B) assume responsibility for reporting,

8 withholding, and paying any applicable taxes

9 under subtitle C, with respect to the individ10 ual’s wages, without regard to the receipt or

11 adequacy of payment from the customer for

12 such services,

13 ‘‘(C) assume responsibility for any em14 ployee benefits which the service contract may

15 require the certified professional employer orga16 nization to provide, without regard to the re17 ceipt or adequacy of payment from the cus18 tomer for such services,

19 ‘‘(D) assume shared responsibility with the

20 customer for firing the individual and for re21 cruiting and hiring any new worker,

22 ‘‘(E) maintain employee records relating to

23 the individual, and

24 ‘‘(F) agree to be treated as a certified pro25 fessional employer organization for purposes of
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1 sections 414(w) and 3511 with respect to such

2 individual.

3 ‘‘(3) WORK SITE COVERAGE REQUIREMENT.—

4 ‘‘(A) IN GENERAL.—The requirements of

5 this paragraph are met with respect to an indi6 vidual if at least 85 percent of the individuals

7 performing services for the customer at the

8 work site where such individual performs serv9 ices are subject to 1 or more contracts with the

10 certified professional employer organization

11 which meet the requirements of paragraph (2).

12 ‘‘(B) SPECIAL RULES.—For purposes of

13 subparagraph (A)—

14 ‘‘(i) WORK SITE.—The term ‘work

15 site’ means a physical location at which an

16 individual generally performs service for

17 the customer or, if there is no such loca18 tion, the location from which the individual

19 receives job assignments from the cus20 tomer.

21 ‘‘(ii) CONTIGUOUS LOCATIONS.—For

22 purposes of clause (i), work sites which are

23 contiguous locations shall be treated as a

24 single physical location.
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1 ‘‘(iii) NONCONTIGUOUS LOCATIONS.—

2 For purposes of clause (i), noncontiguous

3 locations shall be treated as separate work

4 sites, except that each work site within a

5 reasonably proximate area must satisfy the

6 85 percent test under subparagraph (A)

7 for the individuals performing services for

8 the customer at such work site. In deter9 mining whether noncontiguous locations

10 are reasonably proximate, all facts and cir11 cumstances shall be taken into account.

12 ‘‘(iv) WORK SITES 35 MILES OR MORE

13 APART.—Any work site which is separated

14 from all other customer work sites by at

15 least 35 miles shall not be treated as rea16 sonably proximate under clause (iii).

17 ‘‘(v) DIFFERENT INDUSTRY.—A work

18 site shall not be treated as reasonably

19 proximate to another work site under

20 clause (iii) if the work site operates in a

21 different industry or industries from such

22 other work site as determined by the Sec23 retary.

24 ‘‘(f) EMPLOYER AGGREGATION RULES.—
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1 ‘‘(1) IN GENERAL.—For purposes of sub2 sections (c)(2)(B)(ii), (c)(4) and (e), all persons

3 treated as a single employer under subsection (b),

4 (c), (m), or (o) of section 414 shall be treated as 1

5 person.

6 ‘‘(2) PLANS MAINTAINED BY COMPANIES IN

7 SAME CONTROLLED GROUP AS CERTIFIED PROFES8 SIONAL EMPLOYER ORGANIZATION.—For purposes

9 of subsection (b)(4), if certified professional em10 ployer organizations are part of a controlled group,

11 then the certified professional employer organiza12 tions (but no other member of the controlled group)

13 shall be treated as 1 person.

14 ‘‘(3) QUALIFIED PLANS.—For purposes of sub15 section (b)(4)—

16 ‘‘(A) a qualified plan (as defined in section

17 408(p)(2)(D)(ii)) which is maintained by, or an

18 arrangement to provide a simple retirement ac19 count (within the meaning of section 408(p))

20 to, a customer with respect to a work site em21 ployee performing services for such customer

22 shall be treated as if it were maintained by the

23 applicant, and

24 ‘‘(B) work site employees who do not meet

25 the minimum age and service requirements of
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1 section 410(a)(1)(A) (or who are excludable

2 from consideration under section 410(b)(3))

3 shall not be taken into account.

4 ‘‘(g) DETERMINATION OF EMPLOYMENT STATUS.—

5 Except to the extent necessary for purposes of section

6 414(w) or 3511, nothing in this section shall be construed

7 to affect the determination of who is an employee or em8 ployer for purposes of this title.

9 ‘‘(h) REGULATIONS.—The Secretary shall prescribe

10 such regulations as may be necessary or appropriate to

11 carry out the purposes of this section and sections 414(w)

12 and 6503(k).’’.

13 (d) CONFORMING AMENDMENTS.—

14 (1) Section 45(B) of such Code (relating to

15 credit for portion of employer social security taxes

16 paid with respect to employees with cash tips) is

17 amended by adding at the end the following new

18 subsection:

19 ‘‘(e) CERTIFIED PROFESSIONAL EMPLOYER ORGANI20 ZATIONS.—For purposes of this section, in the case of a

21 certified professional employer organization that is treat22 ed, under section 3511, as the employer of a worksite em23 ployee who is a tipped employee, the credit determined

24 under this section does not apply to such organization, but

25 does apply to the customer of such organization. For this
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1 purpose the customer shall take into account any remu2 neration and taxes remitted by the certified professional

3 employer organization.’’.

4 (2) Section 707 of such Code is amended by

5 adding at the end the following new subsection:

6 ‘‘(d) PAYMENTS TO CERTIFIED PROFESSIONAL EM7 PLOYER ORGANIZATIONS.—If a partnership that is a cus8 tomer of a certified professional employer organization (as

9 defined in section 7705) makes a payment to such an or10 ganization on behalf of a partner, and the payment, if

11 made directly to the partner, would be treated as a guar12 anteed payment under section 707(c), the partnership

13 shall treat the payment as if it were a guaranteed payment

14 made to a partner. To the extent that the relevant partner

15 receives all or any portion of such a payment, such partner

16 shall be treated as receiving a guaranteed payment for

17 services under section 707(c).’’.

18 (3) Section 3302 of such Code is amended by

19 adding at the end the following new subsection:

20 ‘‘(h) TREATMENT OF CERTIFIED PROFESSIONAL EM21 PLOYER ORGANIZATIONS.—If a certified professional em22 ployer organization (as defined in section 7705) (or a cli23 ent of such organization) makes a payment to the State’s

24 unemployment fund with respect to a work site employee,
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1 such organization shall be eligible for the credits available

2 under this section with respect to such payment.’’.

3 (4) Section 3303(a) of such Code is amended—

4 (A) by inserting ‘and’ at the end of para5 graph (3),

6 (B) by inserting immediately after para7 graph (3) the following new paragraph:

8 ‘‘(4) a certified professional employer organiza9 tion (as defined in section 7705) is permitted to col10 lect and remit, in accordance with paragraphs (1),

11 (2), and (3), contributions during the taxable year

12 to the State unemployment fund with respect to a

13 work site employee.’’, and

14 (C) in the last sentence—

15 (i) by striking ‘‘paragraphs (1), (2),

16 and (3)’’ and inserting ‘‘paragraphs (1),

17 (2), (3), and (4)’’, and

18 (ii) by striking ‘‘paragraph (1), (2), or

19 (3)’’ and inserting ‘‘paragraph (1), (2),

20 (3), or (4)’’.

21 (5) Section 6053 of such Code (relating to re22 porting of tips) is amended by adding at the end of

23 subsection (c) the following new paragraph:

24 ‘‘(8) CERTIFIED PROFESSIONAL EMPLOYER OR25 GANIZATIONS.—For purposes of any report required
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1 by this section, in the case of a certified professional

2 employer organization that is treated, under section

3 3511, as the employer of a worksite employee, the

4 customer with respect to whom a worksite employee

5 performs services shall be the employer for purposes

6 of reporting under this section and the certified pro7 fessional employer organization shall furnish to the

8 customer any information necessary to complete

9 such reporting no later than such time as the Sec10 retary shall prescribe.’’.

11 (e) CLERICAL AMENDMENTS.—

12 (1) The table of sections for chapter 25 of such

13 Code is amended by adding at the end the following

14 new item:

‘‘Sec. 3511. Certified professional employer organizations.’’.

15 (2) The table of sections for chapter 79 of such

16 Code is amended by inserting after the item relating

17 to section 7704 the following new item:

‘‘Sec. 7705. Certified professional employer organizations.’’.

18 (f) REPORTING REQUIREMENTS AND OBLIGA19 TIONS.—The Secretary of the Treasury shall develop such

20 reporting and recordkeeping rules, regulations, and proce21 dures as the Secretary determines necessary or appro22 priate to ensure compliance with the amendments made

23 by this Act with respect to entities applying for certifi24 cation as certified professional employer organizations or
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1 entities that have been so certified. Such rules shall be

2 designed in a manner which streamlines, to the extent pos3 sible, the application of requirements of such amendments,

4 the exchange of information between a certified profes5 sional employer organization and its customers, and the

6 reporting and recordkeeping obligations of the certified

7 professional employer organization.

8 (g) USER FEES.—Subsection (b) of section 10511 of

9 the Revenue Act of 1987 (relating to fees for requests for

10 ruling, determination, and similar letters) is amended by

11 adding at the end thereof the following new paragraph:

12 ‘‘(4) CERTIFIED PROFESSIONAL EMPLOYER OR13 GANIZATIONS.—The fee charged under the program

14 in connection with the certification by the Secretary

15 of a professional employer organization under sec16 tion 7705 of the Internal Revenue Code of 1986

17 shall not exceed $500.’’.

18 (h) EFFECTIVE DATES.—

19 (1) IN GENERAL.—The amendments made by

20 this Act shall take effect on the later of—

21 (A) January 1, 2005, or

22 (B) the January 1st of the first calendar

23 year beginning more than 12 months after the

24 date of the enactment of this Act.
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1 (2) CERTIFICATION PROGRAM.—The Secretary

2 of the Treasury shall establish the certification pro3 gram described in section 7705(b) of the Internal

4 Revenue Code of 1986 not later than 3 months be5 fore the effective date determined under paragraph

6 (1).

7 (3) TRANSITION ISSUES.—For years beginning

8 before the effective date specified in paragraph (1),

9 subject to such conditions as the Secretary of the

10 Treasury may prescribe, employee benefit plans in

11 existence on the date of the enactment of this Act

12 shall not be treated as failing to meet the require13 ments of the Internal Revenue Code of 1986 merely

14 because such plans were maintained by an organiza15 tion prior to such organization becoming a certified

16 professional employer organization (as defined by

17 section 7705 of such Code (as added by subsection

18 (c) of this section)).

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