401(k) options.

[Guest kavitha]

Hi all,

I used to work as full time employee and now i am going to start as consultant without any benefits that includes 401(k) match by my new employer.

My question is

Can I still roll over my 401(k) account to the new employer.

Any suggestion?

Thanks,

Kavitha

[Mike Preston]

You need to clarify two things with your new "employer". First, are you an employee or not? The term consultant implies that you are not going to be an employee. If you are not an employee you may not participate in their 401(k) plan (not just the match, but the whole thing). However, if you are an employee, even an employee that is precluded from getting a match, you may still be eligible to rollover your money to their plan. However,t he answer as to whether or not you can do so is totally dependent on the language of the plan. The plan may have been written to not allow you a rollover, even if you are an employee.

[GBurns]

I get the impression that you are at the same company (same employer) but with a change in title.

If this is so, be aware that giving you a new title and climing that you are no longer an employee but a consultant might not be valid. It also might mean that even if valid you might still be entitled to benefits under the Plan.

Can you clarify exactly what is happening?

[mbozek]

Since plans are not required to accept rollovers from other plans, why not ask the new employer as to what are the conditions for accepting rollovers?

[Mike Preston]

GBurns, you state that "It also might mean that even if valid you might still be entitled to benefits under the Plan."

I would find it most unusual that, if valid, there would be an entitlement to any benefits under the Plan.

Can you describe any situation where this might be so?

[GBurns]

Think back to cases such as Microsoft (there are also a few other large cases).

Many of their consultants were determined to be employees and were entitled to full benefits even retroactively regardless of what their contract said. Some were because of hours worked but most were because of employer control issues that caused the reclassification by the IRS and the Courts. However, some who were entitled were still not eligible for some benefits because of the eligibility clause in some of the plans.

So even if this poster is a valid consultant and thereby be a 1099 recipient in the future, it does not mean that they might not be benefits eligible because of other reasons (barring a clause in the PD).

[Mike Preston]

Well, I strongly disagree. The issue is whether someone is an employee or a consultant. If they are a consultant they are not entitled to participate in the 401(k) plan. If later, the individual is determined not to be a consultant, then the premise that you quoted (the arrangement is valid) falls apart. As it did in the Microsoft case, it fell apart because the individuals were determined to be employees, not consultants. If that happens in this case, it will be similarly retroactive, but it will have no impact at all on whether a current rollover will be accepted.

I think it is wrong to give an individual advice on this board that implies that if they are a consultant they might have rights to participate in a 401(k) plan.

[mbozek]

Employers can prevent retroactive benefit accrual by excluding service prior to the date the IC is reclassified as an employee in the terms of the plan.

[GBurns]

Mike,

Are you saying that an employer cannot have a plan that allows its independent contractors to participate?

[Mike Preston]

Yes, I am. There are certain exceptions that are so rare as to be bascially non-existent.

[Gilmore]

Just curious Mike; can you give a little detail on the exceptions? Thanks.

[Mike Preston]

Not much since they fall into areas that I don't actively practice in. One is the situation where an individual works for an insurance company as a statutory employee, which is a very complicated arrangement for agents that are, for all intents and purposes, independent contractors eligible to participate in the plans of the insurance companies. Another is certain governmental entities allow participation by people who are not employees. Another would be a plan that is set up as a multiple employer plan, which may not satisfy this particular definition of being a consultant because the individual would be an employee with respect to an entity that participated in the plan. I think the concept of extending benefits to those who are independent contractors is more pervasive in the welfare benefits side of things, which is where GBurns may have gotten the idea from. As I said, these "exceptions" if one wishes to categorize them as such, are almost meaningless in the qualified plan side of things for most plans.

[GBurns]

While I suggest that the cases involving Microsoft and AOL etc should be read, simple searches on Google should bring out a number of articles put out by various law firms on the issue. One such is attached:

http://www.frof.com/articles/artDetail.asp?id=397

[Mike Preston]

That's pretty old news, isn't it? As mbozek said, most plans are now written with "Microsoft" language. That is, even if recharacterized as an employee, the plan would not provide them with any benefits.

Besides, that wouldn't help the OP in any way now because the OP wanted to know whether the current plan would accept a rollover.

[GBurns]

Being old news does not mean that everyone or even most are aware of it, that is why questions are still being asked about aspects of 401(k) that have been there since the inception, but on which people still are not clear.

I looked but I do not see where mbozek or anyone said or even insinuated any such thing. Where did you see that most plans are now written with such language?

What mbozek did say is ..Ask the employer. This is the only way to know if the rollover will be accepted etc.

[g8r]

Sounds like things are getting a little heated. On the initial question, clearly it's a matter of plan design as to whether rollovers will be accepted.

On the employee/consultant issue, I agree with everything Mike stated. Under the code, a plan must be for the exclusive benefit of employees. While the regs elaborate on this (such as permitting beneficiaries on death), there is generally nothing out there permitting a non-employee (i.e., an independent contractor or consultant) to participate. In fact, the IRS revenue ruling on PEOs is based on this. The only way to have non-employees to participate is to have the actual employer of this individual adopt the plan, therby creating a multiple employer plan under IRC 413©. As Mike pointed out there may be very, very limited exceptions (such as the provision in the IRC treating full-time life insurance salespeople as employees - I don't know why they only carve out life insurance but that's what the law provides).

I also agree that most plans contain "microsoft language." Certainly all of the GUST approved non-standardized prototypes and volume submitter plans I've seen contain the langauge. The language is based on the fact that you can exclude anyone you want as long as you pass coverage. Thus, I can write a plan to exclude anyone that I designate as an independent contractor (even if the IRS or a court ultimately determine that the person is a common law employee). It's better to deal with a potential 410b coverage problem than an absolute claim for retroactive benefits should a person be re-classified as a common law employee.

[Mike Preston]

What mbozek said was: "Employers can prevent retroactive benefit accrual by excluding service prior to the date the IC is reclassified as an employee in the terms of the plan. " That is, by adding the Microsoft language.