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Employee funded SEP & MPP


Guest R.Patterson
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Guest R.Patterson

Recently, I met with a new client with a real problem. Several years ago, he went to work for a relatively new company. Being an accomplished professional, the company promised him a high hourly wage. In addition, disability insurance and a fully funded, integrated, SEP and money purchase plan.

When he received his first paycheck it was quite a bit less then expected. When he inquired about the missing pay, he was told that his salary was ‘net’ all of the benefits he was promised including the total social security expense.

Apparently, his employer had recently been required by their industry to convert all, until then, self-employed 1099 status employees to W2 status employees. Reviewing company handouts, he learned that he had to pay for all of the employer related conversion costs. To keep the corporate expenses at prior conversion levels, the company devised an annual, ‘sliding’, hourly pay rate based upon the exact phase-out levels of disability, social security and retirement costs. The company explained that this was to preserve his maximum retirement benefit and expenses at 1099 levels. He was to be an employee in theory only.

Since then, the company has deducting the SEP/IRA, MPP, disability premiums and social security costs from his income. They defend the practice by saying the employees agreed to the sliding rate. Because contracts are signed with the varying rates, the benefits are employer funded. However, if you ask the employees, they will tell you the costs are deducted from their income. In addition, new employees continue to be recruited at the ‘gross’ industry average rate.

My client wants to go to the DOL with this information. This employer has about 150 employees, most with six-figure incomes in this same situation. The liability could be very large. I do not see anything that could be done to correct this situation and I am concerned with the actions the DOL could take with them. I have not been able to find any court cases like this and would like direction in finding related cases. In addition, what do you think the DOL would do for my client?

R.Patterson

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  • 2 weeks later...
Guest Shelton

If the employee is paid W-2 wages, then he should not be responsible for financing plan funding.

The DOL would require the plan to compensate your client- including interest.

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