Leaderboard

I agree with duckthing the primary problem isn't a retirement law issue but an employment law issue. It is next to impossible for a person to have be a 1099 contractor and W-2 employee. Once that issue is solved most of your issues are solved would be my guess as this person is most likely either all W-2 employee or all 1099 contractor. If by chance this person is a mix I like door #1 but can't cite anything to prove it is correct.

I don't think there's a quick answer here without more information from the employer. There are legitimate if rare situations where an employee could also be receiving a 1099-MISC for comp outside of the normal employer/employee relationship, in addition to their W-2 wages. So I think the question that needs to be asked of the employer (and they should throw it to their counsel, not just have somebody in payroll answer) is whether the 1099 was for services the person actually performed as an independent contractor or not. From the wording of the question, it sounds like the answer is no -- that this employee just decided they want part of their pay on a W-2 and part of it on a 1099. If that's the case then they have withholding and reporting issues that need to be sorted out. The result of sorting those issues out may be that the participant ends up getting a corrected W-2 for the year(s) in question, and it's possible the plan doesn't need to refund any deferrals -- if all of this compensation was eligible for plan purposes, it didn't become ineligible just because the employer reported it incorrectly, and a corrected W-2 showing the full amount available for deferrals should answer the question of how the plan should treat the compensation.