Eligible Employee to Independent Contrator

[Guest Julie]

We maintain a separate plan (because of a controlled group situation) in which only agency employees may participate. Because pay/personnel records are maintained by each agency, rather than our corporate headquarters, things go on that I never seem to know about until after the fact.

Recently, the accountant for one of the agencies, who happens to do the payroll and send contributions through to the record keeper, decided he no longer wanted to be an employee of the agency even though he's spending more than 40 hours per work doing the agency accounting. He convinced the agency principal that he should be paid as an independent contrator. (Rumor has it that he did this due to his impending divorce.) Anyway, he has an account balance in the plan and an outstanding loan. I just found out that the independent contractor status occurred about a month ago, and luckily he stopped contributing, but he did not stop making loan repayments.

I'm totally lost on how we should be handling this. In my mind's eye, because he's no longer an employee, he should not be permitted to make contributions or loan repayments. I'm also not sure that we can permit him to withdraw his entire account balance, which is what he wants to do now that I said he can't make loan repayments. By the way, our plan does not permit a terminated employee to continue to make loan repayments.

Any thoughts??

[No Name]

Such a muddy little creek! IC status should be explored first; dirtiest of the problems. Loan policy could be changed; usually a document separate from the plan.

Maybe IC's could be allowed repayment priveleges. Good for the spouse. I wouldn't allow deferrals until IC issue resolved. Might even insist on a form declaring "0% deferrals" while issue 1 is resolved.

Issue 2 is also tricky. Is there a separation from service, or a hat change?

I've taken so much time to write this that I'm afraid someone might get ahead of me, so hitting send.