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Spouse's Unpaid Service


austin3515
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The owner can't have it both ways (although they generally want it that way) -- i.e., can't keep the spouse off the payroll (so that the owner is paid all income for the family and saves FICA otherwise payable by & on behalf of the spouse), but have the spouse considered an employee who is paid and therefore has h/s.

I agree with others: no pay or entitlement to payment = no h/s (that's basically straight from the regs).

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By the way if you say she should be in the day she first gets paid because she had the years of service and hours already how does that change prior year's testing?

After all you are saying she worked >1,000 in those years, she had 1 YOS, just no comp. Should she have been a zero on the ADP test, a person on coverage?

One might reply that would tend to make the test better, which is true. But you didn't put her on those years because you didn't think she was an employee those years. Now you are saying she was.

I think you are opening bigger can of worms then you think if you let her in.

Sorry, you just got a stream of thought written here.

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Can someone explain to me how ya'll are deciding the "entitled to payment" language does not apply? Especially given that she's now elected to actually receive such payment? Nothing has changed from the past to now, other than her deciding she wants into the plan, so if she's entitled to payment now, how was she not entitled in the past?

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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If it is just him and (possibly) the spouse, why would they put in safe harbor option?
Oops. Of course you're right. My mistake for reading too fast.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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By the way if you say she should be in the day she first gets paid because she had the years of service and hours already how does that change prior year's testing?

After all you are saying she worked >1,000 in those years, she had 1 YOS, just no comp. Should she have been a zero on the ADP test, a person on coverage?

One might reply that would tend to make the test better, which is true. But you didn't put her on those years because you didn't think she was an employee those years. Now you are saying she was.

I think you are opening bigger can of worms then you think if you let her in.

Sorry, you just got a stream of thought written here.

I'd think this could be covered under who's excluded from the plan. Of course I don't deal w/ testing so no idea how excluded persons affect those results.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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masteff --

I think "entitled to payment" means you will be paid, but just haven't been paid yet.

So, an employee paid once a month, on the 5th, is considered to have h/s in the prior month when the h/s have been completed but before the employee has been paid for those hours. For example, if you have 990 h/s going into December, you will have a y/s even though December's hours aren't paid until Jan. 5. Or, if you defer half of your pay into a non-qualified plan, you still have earned h/s because you are entitled to payment for the hours that you performed (albeit later).

If you are receving health benefits, then I can see the argument that you are being "paid" for those hours although you are not being paid in cash for working. And, I can see an argument that an owner who decides not to take any pay in order to pay other employees also has completed h/s--and the same might apply to the spouse of the owner. So, this situation is probably a fact-specific determination.

If prior service is awarded in this case, this spouse is already fully vested, too.

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K2Retire

if you have really good document language it will be apparent how to handle. generally you wouldn't count the person in 2010 unless you specifically checked otherwise.

Sample Corbel language not sure what other documents say

Administrative delay ("the first few weeks") rule. 415 Compensation for a limitation year shall not include, unless otherwise elected in Section 2.2 of this Amendment, amounts earned but not paid during the limitation year solely because of the timing of pay periods and pay dates. However, if elected in Section 2.2 of this Amendment, 415 Compensation for a limitation year shall include amounts earned but not paid during the limitation year solely because of the timing of pay periods and pay dates, provided the amounts are paid during the first few weeks of the next limitation year, the amounts are included on a uniform and consistent basis with respect to all similarly situated participants, and no compensation is included in more than one limitation year.

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We're on Corbel non-standfardized EGTRRA prototype, though I presume this is covered in the Basic Plan Document...

Ok, so the language I quoted before would apply in your case. (Eligible employees do not include outsourced workers and workers that are not common law employees. Common law employees must be on the payroll records.) BTW, this language is in the document due to the Microsoft case that was mentioned by someone else in this topic.

So again, I don't think the wife is an eligible employee until she is on the payroll and must meet the eligibility requirements from the date she first earns wages from the Employer.

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I'm going form memory here and unfortunatly don't have anything writen to go on so I could be wrong. But I agree with the no pay = no hours. I seem to recall this question coming up at more than on ASPPA meeting at the IRS responce from the podium was always, no the employee is not considered an employee. Again, I'm going on my memory of conferences and have nothing written to back it up so take that for what it is worth.

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An excerpt from the EOB:

Caution: IRS has taken adverse position in an audit. We have been informed of an IRS audit on a defined benefit plan that counted service for years that the business owner’s wife performed services to the company but took no salary. The IRS took the position that the noncompensated years of service could not be counted, interpreting a noncompensated period of service to be a "gifting" of the services to the company and, thus, not "entitled to payment" within the meaning of the DOL regulations. This resulted in a disallowance of deductions for contributions to the pension plan that were based on what IRS felt was an overstated accrued benefit. The nondeductible contributions were also subject to excise taxes under IRC §4972.

PensionPro, CPC, TGPC

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Do you think the IRS would take the same position if the 100% owner of the business did not pay himself/herself for a year or 2 in a legiitimate effrort to keep the buisness afloat & pay other employees? And, what if, in the same vein, spouse was also not paid, again simply to make certain that the business had the appropriate support and could pay other employees/expenses?

The intent, of course, would be to pay both when the business turned the corner and could afford to. How could you deny a y/s in that case?

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We were just discussing that question this morning. Of course, we don't know the circumstances in the plan audit in question, but lots of times the cost of litigation, even if you believe you will prevail, exceeds the gain if you prevail (winning the battle but losing the war.) So just because an audit was closed on this basis doesn't necessarily mean it is correct, or that the IRS would prevail if challenged in court. I agree with you that it is most unreasonable to deny a YOS in such a situation. Might be a good issue to bring up at ASPPA conference.

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We were just discussing that question this morning. Of course, we don't know the circumstances in the plan audit in question, but lots of times the cost of litigation, even if you believe you will prevail, exceeds the gain if you prevail (winning the battle but losing the war.) So just because an audit was closed on this basis doesn't necessarily mean it is correct, or that the IRS would prevail if challenged in court. I agree with you that it is most unreasonable to deny a YOS in such a situation. Might be a good issue to bring up at ASPPA conference.

I agree. I think it's fair to say that the conservative position is not to try to count unpaid hours, and the IRS is unlikely to ever say "no, no, no, Mrs. Owner should have come in in year X-1." But that doesn't mean it is right.

Ed Snyder

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I just received a response from Corbel (Robert Richter) to my question about the determination of "eligible employee". The microsoft language is in there to keep out people that are independent contractors. This language relates to the nonstandardized and volume submitter documents because it would be okay to exclude them (but is subject to 410(b) testing). You can't have exclusions in the standardized doc that would violate 410(b).

(My interpretation:)

Standardized document - would include anyone that performs services for the employer (regardless of their compensation)

Nonstd & Vol Submitter - language excludes independent contractors (performs services but is not on the payroll)

He further states that compensation does not matter. The issue is whether the person performed services for the employer. If so (even if no comp), the service counts. If no service, no time with the employer. It would become a matter of how many hours she worked each year. According to Robert, "Self-employed individuals are treated as employees for plan purposes so I'd say the prior service counts......If she's doing the same job, etc., then it means to me that all her service counts - but when she wasn't paid she couldn't get any benefits (due to 415 - not b/c she was in an excluded class)."

In thinking about this response, it wouldn't matter what document you are on - the wife would have been included in 410(b) when she met the age and service requirements. She just would not be benefitting until she has compensation (unless she is specifically excluded in some way).

Personal note: Seems like our census requests need to ask for anyone performing services, not just those with hours and comp! :o

I wrote this kind of fast - hope it makes sense!

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