I
106TH CONGRESS
1ST SESSION
H. R. 3490
To amend the Internal Revenue Code of 1986 to clarify the status of profes-
sional employer organizations and to promote and protect the interests
of professional employer organizations, their customers, and workers.
IN THE HOUSE OF REPRESENTATIVES
NOVEMBER 18, 1999
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 em-
ployer organizations, their customers, and workers.
Be it enacted by the Senate and House of Representa-
tives 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 1999’’.
SEC. 2. NO INFERENCE.
Nothing contained in this Act or the amendments
made by this Act shall be construed to create any infer-
ence with respect to the determination of who is an em-
ployee or employer—
(1) for Federal tax purposes (other than the
purposes set forth in the amendments made by sec-
tion 3), or
(2) for purposes of any other provision of law.
SEC. 3. CERTIFIED PROFESSIONAL EMPLOYER ORGANIZA-
TIONS.
(a) EMPLOYMENT TAXES.—Chapter 25 of the Inter-
nal 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 ORGANI-
ZATIONS.
‘‘(a) GENERAL RULES.—For purposes of the taxes
imposed by this subtitle—
‘‘(1) a certified professional employer organiza-
tion 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 remu-
neration 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 re-
spect to such taxes imposed on such remuneration.
‘‘(b) SECONDARY CUSTOMER LIABILITY
FOR EM-
PLOYMENT TAXES.—
‘‘(1) IN GENERAL.—Notwithstanding subsection
(a), if—
‘‘(A) as of the date any payment of taxes
imposed by this subtitle is due, the certified
professional employer organization does not
meet the requirements of paragraph (3),
‘‘(B) the customer has not made adequate
payments to the certified professional employer
organization pursuant to the service contract
under this subtitle with respect to work site em-
ployees performing services for such customer,
or
‘‘(C) in accordance with regulations pre-
scribed by the Secretary, the Secretary deter-
mines that the application of this subsection to
a class of customers which includes such cus-
tomer is appropriate to prevent an undue and
large risk with respect to the ultimate collection
of taxes under this subtitle,
the customer shall, subject to paragraph (2), also be
liable for any payment under this subtitle which the
organization is required to make under this section.
‘‘(2) SPECIAL RULE.—The Secretary shall not
take any action against the customer with respect to
liability under paragraph (1) until after 45 days—
‘‘(A) after notice and demand by the Sec-
retary against the certified professional em-
ployer organization for taxes due under this
subtitle, or
‘‘(B) in the case of a failure to file a re-
turn with respect to such taxes, after such re-
turn was due.
‘‘(3) REQUIREMENTS.—
‘‘(A) IN GENERAL.—An organization meets
the requirements of this paragraph with respect
to a payment if—
‘‘(i) the organization meets—
‘‘(I) the net worth requirements
of subparagraph (B) as of the last
day of both the fiscal quarter of the
fiscal year of the organization in
which the payment is due and the pre-
ceding quarter, or
‘‘(II) the bond requirements of
subparagraph (C) at all times during
the fiscal quarter in which the pay-
ment is due, and
‘‘(ii) the organization provides to the
Secretary an examination level attestation
from an independent certified public ac-
countant not later than the last day of the
second month beginning after the end of
the calendar quarter in which the payment
is due that there is no material reason to
question the organization’s assertions with
respect to the adequacy of Federal employ-
ment tax payments for such calendar quar-
ter.
‘‘(B) NET WORTH.—The requirements of
this subparagraph are as follows:
‘‘If number of work site em-
ployees is:
Its net worth must be at least:
Less than 500 ................................
$50,000.
500 or more but less than 1,500 ...
$100,000.
1,500 or more but less than 2,500
$150,000.
2,500 or more but less than 4,000
$200,000.
4,000 or greater ............................
$250,000.
‘‘(C) BOND.—An organization meets the
requirements of this subparagraph if such orga-
nization posts a bond for the payment of taxes
under this subtitle in a form acceptable to the
Secretary and in an amount equal to the
amount described in subparagraph (B) with re-
spect to such organization.
‘‘(D) FAILURE TO FILE.—If the certified
professional employer organization fails to file
the attestation required by subparagraph (A)(ii)
with respect to a particular quarter, then the
requirements of this paragraph with respect to
such failure shall be treated as not satisfied for
the period beginning on the due date for such
attestation and ending on the first day of the
first calendar quarter following two consecutive
calendar quarters (beginning after the failure)
for which such attestation requirement is met.
‘‘(E) EXCLUSION
OF
GOODWILL
AND
OTHER
INTANGIBLES.—For purposes of this
paragraph, net worth shall be determined with-
out regard to goodwill and other intangibles.
‘‘(4) SUCCESSOR EMPLOYER STATUS.—For pur-
poses of sections 3121(a) and 3306(b)(1)—
‘‘(A) a certified professional employer or-
ganization 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 em-
ployer, and
‘‘(B) a customer whose service contract
with a certified professional employer organiza-
tion is terminated with respect to a work site
employee shall be treated as a successor em-
ployer 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 or-
ganization shall be treated as the employer of
any individual (other than a work site em-
ployee) who is performing services covered by a
contract meeting the requirements of section
7705(d)(2)(F), but only with respect to remu-
neration 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.
‘‘(2) LIABILITY.—Paragraph (1) shall not be
construed to relieve liability of any other individual
or entity for such taxes.
‘‘(d) SPECIAL RULE FOR RELATED PARTY.—Sub-
sections (a) and (b) shall not apply in the case of a cus-
tomer 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 sec-
tions shall be applied by substituting ‘10 percent’ for ‘50
percent’.
‘‘(e) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary or appropriate to
carry out the purposes of this section, including—
‘‘(1) rules for the appropriate allocation (includ-
ing on a pro rata basis) of payments of taxes made
by professional employee organizations among cus-
tomers also liable for such taxes, and
‘‘(2) rules for applying this section to profes-
sional employee organizations which are not in exist-
ence for quarters preceding the quarter in which a
service contract under section 7705(d)(2)) is in ef-
fect.’’.
(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:
‘‘(v) CERTIFIED PROFESSIONAL EMPLOYER ORGANI-
ZATIONS.—
‘‘(1) PLANS MAINTAINED BY CERTIFIED PRO-
FESSIONAL EMPLOYER ORGANIZATIONS.—
‘‘(A) IN GENERAL.—Except as otherwise
provided in this subsection, if a certified profes-
sional employer organization establishes or
maintains a plan 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 main-
tained 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 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)—
‘‘(I) the portion of the plan es-
tablished by the certified professional
employer organization which covers
work site employees performing serv-
ices for a customer shall be treated as
a separate plan of the customer (in-
cluding for purposes of any disquali-
fication or correction),
‘‘(II) the customer shall be treat-
ed as establishing and maintaining
the plan, as the employer of such em-
ployees, and as having paid any com-
pensation remitted by the certified
professional employer organization to
such employees under the service con-
tract entered into under section
7705(d), and
‘‘(III) a controlled group that in-
cludes a certified professional em-
ployer 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 sub-
sections (b), (c), (m), and (o) shall be
treated as members of the same controlled
group.
‘‘(ii) 
SELF-EMPLOYED
INDIVID-
UALS.—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)),
or a shareholder-employee (as defined in
section 4975(f)(6)(C)), but for the rela-
tionship with the certified professional em-
ployer organization, shall be treated as a
self-employed individual for purposes of de-
termining eligibility for employee benefit
plans maintained by such certified profes-
sional employer organization.
‘‘(iii) LISTED
REQUIREMENTS.—The
requirements listed in this clause are—
‘‘(I) NONDISCRIMINATION.—Sec-
tions 79(d), 105(h), 125(b), 127(b),
129(d), 
132(j)(1), 
274(j)(3)(B),
401(a)(4), 
401(a)(17), 
401(a)(26),
401(k)(3), 401(m)(2), 410(b), 414(q),
415, 416, 422, 423(b), and 505(b).
‘‘(II) 
SIZE.—Sections 
220,
401(k)(11), 401(m)(10), 408(k), and
408(p).
‘‘(III) 
ELIGIBILITY.—Section
401(k)(4)(B).
‘‘(2) PLANS
MAINTAINED
BY
CUSTOMERS
OF
CERTIFIED
PROFESSIONAL
EMPLOYER
ORGANIZA-
TIONS.—If a customer of a certified professional em-
ployer organization provides (other than through
such organization) any employee benefits, then with
respect to such benefits—
‘‘(A) work site employees of the organiza-
tion who perform services for the customer shall
be treated as leased employees of such cus-
tomer,
‘‘(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 em-
ployees, sections 105(h), 403(b)(12), 422, and
423 shall be treated as a benefit listed in sub-
section (n)(3)(C).
‘‘(3) RULES
APPLICABLE
TO
PLANS
MAIN-
TAINED
BY
CERTIFIED
PROFESSIONAL
EMPLOYER
ORGANIZATIONS AND PLANS MAINTAINED BY THEIR
CUSTOMERS.—
‘‘(A) SERVICE CREDITING FOR PARTICIPA-
TION AND VESTING PURPOSES.—In the case of
a plan maintained by a certified professional
employer organization or a customer, for pur-
poses of determining a work site employee’s
service for eligibility to participate and vesting
under sections 410(a) and section 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 pro-
vided in clause (ii), for purposes of sub-
section (s) and section 415(c)(3), or other
comparable provisions of this title based on
compensation which affects employee ben-
efit plans, compensation received from the
customer with respect to which the work
site employee performs services shall be
taken into account together with com-
pensation received from the certified pro-
fessional employer organization.
‘‘(ii) EXCEPTION.—For purposes of
applying sections 404 and 412 to a plan
maintained by a certified professional em-
ployer organization, only compensation re-
ceived from the certified professional em-
ployer organization shall be taken into ac-
count.
‘‘(4) 
SPECIAL
RULES
WHERE
MULTIPLE
PLANS.—
‘‘(A) IN GENERAL.—For purposes of ap-
plying section 415 with respect to a plan main-
tained by a certified professional employer orga-
nization, 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 organiza-
tion 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.
‘‘(5) TERMINATION OF SERVICE CONTRACT BE-
TWEEN CERTIFIED PROFESSIONAL EMPLOYER ORGA-
NIZATION AND CUSTOMER.—
‘‘(A) IN GENERAL.—
‘‘(i) 
TREATMENT
OF
SUCCESSOR
PLAN.—If a service contract between a
customer and a certified professional em-
ployer organization is terminated and work
site employees of the customer were cov-
ered by a plan maintained by the organiza-
tion, then, except as provided in regula-
tions, any plan of a certified professional
employer organization or the customer
which covers such work site employees
shall be treated as a successor plan.
‘‘(ii) 
TREATMENT
AS
SEVERANCE
FROM
EMPLOYMENT
AND
SEPARATION
FROM SERVICE.—If a service contract be-
tween a customer and a certified profes-
sional employer organization is terminated,
and there is no plan treated as a successor
plan under clause (i), then such termi-
nation shall be treated as a severance from
employment and a separation from service
of each work site employee of such cus-
tomer.
‘‘(B) DISTRIBUTION
RULES
APPLICABLE
TO
SUBPARAGRAPH (A)(ii).—In any case to
which subparagraph (A)(ii) applies, the certified
professional employer organization plan may
distribute—
‘‘(i) during the 2-year period begin-
ning on the date of such termination (in
accordance with plan terms) only—
‘‘(I) elective deferrals,
‘‘(II) qualified nonelective con-
tributions (within the meaning of sec-
tion 401(m)(4)(C)), and
‘‘(III) matching contributions de-
scribed in section 401(k)(3)(D)(ii)(I),
of former work site employees associated
with the terminated customer only in a di-
rect 
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 ORGANI-
ZATION 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 ORGANI-
ZATIONS.
‘‘(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 profes-
sional employer organization for purposes of sections
414(v) and 3511 and who has been certified by the Sec-
retary as meeting the requirements of subsection (b).
‘‘(b) CERTIFICATION.—A person meets the require-
ments 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 sta-
tus, background, experience, business location, and
annual financial audits,
‘‘(2) represents that it will provide the Sec-
retary within 6 months after the close of each fiscal
year of such person ending after certification pursu-
ant to this section with an opinion of an independent
certified public accountant as to whether the cer-
tified professional employer organization’s financial
statements are presented fairly in accordance with
generally accepted accounting principles,
‘‘(3) represents that it will satisfy such report-
ing 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 its work site employees,
and
‘‘(5) agrees to notify the Secretary in writing of
any change that affects the continuing accuracy of
any representation or information which was pre-
viously made or provided.
‘‘(c) SUSPENSION AND REVOCATION AUTHORITY.—
The Secretary may suspend or revoke a certification of
any person under subsection (b) for purposes of section
414(v) or 3511, or both, if Secretary determines that such
person is not satisfying the requirements or representa-
tions of subsection (b) or fails to satisfy applicable report-
ing, payment, or deposit requirements.
‘‘(d) WORK SITE EMPLOYEE.—For purposes of this
title—
‘‘(1) IN GENERAL.—The term ‘work site em-
ployee’ means, with respect to a certified profes-
sional employer organization, an individual who—
‘‘(A) performs services for a customer pur-
suant to a contract which is between such cus-
tomer 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 pro-
vides that the certified professional employer organi-
zation shall—
‘‘(A) assume responsibility for payment of
wages to the individual, without regard to the
receipt or adequacy of payment from the cus-
tomer for such services,
‘‘(B) assume responsibility for reporting,
withholding, and paying any applicable taxes
under subtitle C, with respect to the individ-
ual’s wages, without regard to the receipt or
adequacy of payment from the customer for
such services,
‘‘(C) assume responsibility for any em-
ployee benefits which the service contract may
require the certified professional employer orga-
nization to provide, without regard to the re-
ceipt or adequacy of payment from the cus-
tomer for such services,
‘‘(D) assume shared responsibility with the
customer for firing the individual and for re-
cruiting and hiring any new worker,
‘‘(E) maintain employee records relating to
the individual, and
‘‘(F) agree to be treated as a certified pro-
fessional employer organization for purposes of
sections 414(v) 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 indi-
vidual if at least 85 percent of the individuals
performing services for the customer at the
work site where such individual performs serv-
ices are subject to one 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 loca-
tion, the location from which the individual
receives job assignments from the cus-
tomer.
‘‘(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 deter-
mining whether noncontiguous locations
are reasonably proximate, all facts and cir-
cumstances 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 rea-
sonably 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 or for a
different business purpose from such other
work site as determined by the Secretary.
‘‘(e) EMPLOYER AGGREGATION RULES.—
‘‘(1) IN
GENERAL.—For purposes of sub-
sections (b)(4) and (d), all persons treated as a sin-
gle employer under subsections (b), (c), (m), or (o)
of section 414 shall be treated as one person.
‘‘(2) QUALIFIED PLANS.—For purposes of sub-
section (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 ac-
count (within the meaning of section 408(p))