401(k) for house hold employees

[Guest A. Medjid]

Beleive it or not, I have a client who has 15 household employees, all bieng paid W2 income. The employer (head of houdehold) would like to establish a 401(k) Plan, with no employer match, the employer will not participate in Plan. I see no reason they can not establish a Plan, but have found nothing to substantiate.

[IRC401]

Historically only a trade or business could establish a 401(a) plan. Because household employees did not work for a trade or business, they could not participate in a qualified plan.

I seem to remember there being a change to this rule in the 2001 Tax Act, although the change might be limited to IRAs. I suggest that you look at the Act.

[GBurns]

Who is the common law employer of the W2 employees? Did your client set up a personal service corporation, a Qualified Residence Trust or some other intermediate entity?

If he has some intermediate entity, then it should be ok. I have my doubts about doing it without the entity, but that is just gut feeling.

You have raised my curiousity and I hope that I have time to do some research on my own, especially since I have heard of such households ( but not in my client base).

[Gary Lesser]

Without some "entity" (see above message) the amounts contributed are not deductible AND arguably subject to the 10 percent nondeductible contribution penalty tax (ditto for SEPs). [unlikely that statute of limitations will expire unless, in general, Form 5330 filed]

However, the houshold may set up a SIMPLE 401(k) or SIMPLE IRA effective no sooner than the 2002 tax year. The required employer contributions under the SIMPLE would not be deductible, nor subject to the 10 percent tax. [EGTRRA Sec 637(a). ©, and (d)]