Year of service

[Guest mparker2028]

Owner wants to put wife in plan for 2005

she has worked 4 days per week, 8 hrs per day since 1/1/04 but has never received compensation

eligiblity 1 year service, age 21 - entry 1/1, 7/1 with changes to salary reduction any time

owner wants to pay her just enough salary so she defer max for '05, receive 3% safe harbor and profit sharing

does anyone know if you must receive compensation to consider your "year of service" for eligiblity?

this sounds wrong to me

any other issues that stand out here?

thanks

[WDIK]

You will find an interesting discussion in the following thread:

http://benefitslink.com/boards/index.php?showtopic=21923

If you want my personal opinion, if you have legitimate documentation that the spouse worked the required number of hours for eligibility then she should become a participant.

[J2D2]

How do you measure contributions/benefit if the spouse has no compensation?

[WDIK]

As the original poster indicated, the spouse would be given salary in 2005. The issue is whether or not she would be an eligible participant in 2005 based on sufficient hours but no compensation in 2004.

[GBurns]

But how can you count hours if there was no compensation?

If no compensation, there was no employment status, so what documentation could there be?

If there is employment status but no compensation How could she have been counted for WC etc? And if not counted, how could she be an employee?

If an employee but not counted and reported for WC, UC, GL etc, What sort of problems for fraud etc might this employer be facing if he starts 'gaming" the documents just for his spouse?

Once any documentation is created it might be difficult to keep it out of the other issues if anything arises.

[WDIK]

Once any documentation is created it might be difficult to keep it out of the other issues if anything arises.

I see this as a very pertinent point. Certainly the determined status could not remain solely in the vaccuum pertaining to the retirement plan. It does seem to me, though, that hours worked could be documented in a number of ways (time card, statements by office staff, etc.). Just because the agreed upon rate of pay is zero does not mean that no employee services were peformed.

[GBurns]

I do not think that you can have zero as a rate of pay.

First there are the minimum wage laws, then there is the IRS issue of reasonable compensation. I would think that reasonable compensation would be even more a factor because of ownership attribution rules. She is the spouse of the owner, isn't she? Do attribution rules apply to Pension and PS Plans?

[Bird]

First there are the minimum wage laws

Don't apply to spouses.

then there is the IRS issue of reasonable compensation

Might be a problem, but it's not a pension problem. Something tells me that if they look at this at all, they look at the whole package of husband and wife comp vs. production - I could be wrong, but I seem to remember that from somewhere.

[Tom Poje]

well, in one sense it is a pension problem. for example, in a 401k plan would you include such a person in the ADP test?

The IRS has expressed an 'opinion' (nothing concrete) at numerous conferences that you would not include such people in testing - they are of course concerned you would use such people to artificially pass testing.

[WDIK]

Certainly it seems clear that no compensation means not in the test, but does that mean that such people are not participants? And again, in this context, the spouse will have compensation for 2005.

[Lame Duck]

DOL Reg. Section 2530.200b-2 defines an hour of service as "each hour for which an employee is paid or entitled to payment for the performance of duties for the employer." These regulations are made specifically applicable to IRC Sections 410 and 411 (2530.200a-3).

IMHO, since the spouse was not paid for her service, the question is whether she was entitled to payment. If her rate of pay was zero, I would find it hard to argue that she was entitled to payment for her hours of service. In that case, she would not be credited with any hours of service and would not meet the eligibility requirements. Most plan documents I've seen use the DOL definition of hour of service. What does your document say?

Is there any reason (e.g. other employees) why the plan cannot be amended to change the eligiblity requirements to participation on the entry date next following date of hire?

[WDIK]

Two points.

1) The first sentence of the section cited by Lame Duck starts out by stating "An hour of service which must, as a minimum, be counted..." (emphasis added). It would appear that an employer could be more liberal in defining of an hour of service.

2) Plan language is certainly a factor that will impact determining an hour of service. However, I do not concur (at least presently) that a spouse of a business owner is not entitled to payment simply becuase there has been no payment.

[GBurns]

I thought that only employees (or self-employed persons) are allowed to work (participate in the day to day activities) in a business. Even members of the Board of Directors cannot participate in the day to day activites. What makes a spouse able to participate?

A person working for or participating in the day to day operating activities of a company must be an employee. Aside from the IRS see the by-laws etc of the company itself and ask your GL and WC insurers what is in those policies about employees and non-employees. Employees MUST be paid for services rendered.

[WDIK]

You raise some very interesting points, but I don't think that it is as black and white as you portray.

For example, the census bureau reports as employed certain "unpaid family workers" that work 15 or more hours a week.

Another example is the husband that is denied unemployment insurance because he is not considered totally unemployed due to assisting in the operation of his spouse's business even though no pay is received.

Other examples may support your position.

I would be interested if anyone can provide a definitive citation one way or the other.

[GBurns]

Since it is the IRS that is of concern with this issue, I do not think that it matters what the Census Bureau, BLS or such others might have as classifications.

For this issue, I would go by the IRS rules etc which are very very clear, whether by ruling or court adjudication.

[Bird]

the IRS rules etc which are very very clear

Sorry, I must have missed something. What were those cites again?

[GBurns]

Cites for what particular item?

Reasonable compensation ? Services without compensation or Working without pay? Non-employee working in business? Board of Directors? Corporate by-laws?

In general, www.irs.gov and www.ustaxcourt.gov

There and a good taxation manual and a business law text should help you.

Or just start with a Google search on things such as "reasonable compensation" "hiring your spouse" and you should a multitude of cites, references, opinions, examples and warnings. For example:

http://taxes.about.com/od/scorporations/qt...onable_comp.htm

http://www.revoptom.com/archive/DEPT/ro0500mgt.htm

http://www.brookwoodtax.com/business_tax_g...your_spouse.htm

If you need a couple court cases, let me know, I might find time to look in my archives.

[Bird]

Cites for what particular item?

the IRS rules etc which are very very clear

I checked the links and found they are third party recommendations that you pay your spouse what you would pay someone else in a similar position.

[WDIK]

I searched the IRS website for "zero salary" and came up with nothing.

I searched the IRS website for "unpaid family" and came up with nothing.

I searched the IRS website for "unreasonable salary" and came up with the following:

"Unreasonable salaries. If a corporation pays an employee who is also a shareholder a salary that is unreasonably high considering the services actually performed by the shareholder-employee, the excessive part of the salary may be treated as a distribution to the shareholder-employee. For more information, see chapter 2 in Publication 535."

I have asked several CPA's that have told me that paying a spouse zero is allowable, but they cannot provide the authority for their position. I am certainly open to either position in this debate, but would like something a little more definitive than has been provided thus far.

[GBurns]

It is a bad time of the year for research, but give me a few days and I will get you some cites etc.

I did not think that it would be so hard to see that there must be a bona fide employer/employee relationship, and that all employees must be paid for services rendered, and only employees or ICs can render certain services, and that employees are subject to minimum wage laws, and that employee benefits are for employees.

But since you need cites and case law, I will get it.

WDIK

A large percentage of CPAs do no taxation. According some sources (MicroMash, Wiley, Becker etc) a good percentage of CPAs do not even pass the taxation section of the Exam. You can fail that section yet still pass that Part of the Exam. So you should always make sure that the CPA is taxation competent. It does not necessarily come with the designation. Many learn taxation by other study.

[WDIK]

This subject has been bothering me, so I decided to do some additional research and will share the results here in summary.

Telephone conversation with the IRS: A non-owner spouse is not required to receive compensation if an agreement is in place designating said spouse as a volunteer, otherwise compensation is required. The owner must receive compensation.

Telephone conversation with the DOL (wage division): A non-owner spouse must receive compensation unless the company's revenues are under $500,000 and the company does not participate in interstate commerce, in which case no compensation is required because the company is not subject to FLSA. The owner is not required to receive compensation.

Telephone conversation with workers' compensation: An unpaid spouse is treated as an employee and will be treated as receiving compensation whether or not wages are paid.

Telephone conversation with state labor division: An unpaid spouse is considered an employee by definition.

Actual state code: Employee does not include an individual employed as an agricultural laborer, or in the domestic service of a family or person at his home, or an individual employed by his parent or spouse.

Additional state code reference: The minimum wage established in this chapter does not apply to an employee who is a member of the employer's immediate family.

A web article indicating that a community property state would probably treat the unpaid spouse as constructively receiving half of the business income as wages subject to FICA.

Numerous web article presenting the advantages and disadvantages of unpaid family members.

This has become almost laughable (if I hadn't wasted so much time). I will therefore replace my previous comments with the following two:

Consider Lame Duck's final sentence.

It's just easier to pay the spouse.

[GBurns]

There are a few Gotcha's that are hidden in those telephone responses which were not very complete. But you did say "in summary".

IRS: Can volunteers qualify for employee benefits.

DOL (wage division): The definition of interstate commerce and other items not mentioned will catch many unawares by the broad scope. Ordering online or from a catalog from anyone located in another state becomes interstate commerce. So a repair service that orders parts from GE etc engage in interstate commerce. Any large retail store of any sort will find it very difficult not to engage in interstate commerce. A copy machine repair service that send out board repair or does warranty work etc has problems. There are many gotcha's in FLSA.

Workers Comp: The spouse has to be included but all included must be classed and be on the payroll. Without both the quote cannot be done and the policy would not be issued. WC quotes rates need payroll data.

State labor division: Do any state laws allow unpaid employees? What was the definition of "employee" ? The definition of employee usually includes compensation for services.

Actual state code and state code reference: "an individual employed by his parent or spouse" and "is a member of the employer's immediate family" would not apply here since the employer is a corporate entity. Altough owned by the spouse, it is still the corporate entity that is the employer not the spouse.

You missed the state wage division regarding state minimum wages and UC. How would the spouse be reported for UC?

All of this makes Lame Duck's statement even more appropriate.

[Bird]

Thanks, WDIK, for the effort. I did some research (not nearly as much) and found similar results.

[Earl]

In one of their more righteous statements, for which I have heard nothing to contradict:

2002 Annual Conference IRS Questions and Answers

p 38. Spouse works for husband’s business for many years (over 1000 hours/year) without taking paycheck. In 2002 spouse begins taking paycheck. For plan purposes what is spouse’s hire date? When she originally started working or when she started getting paid?

When she started getting paid.

[Dougsbpc]

I know this was discussed a long time ago, but it is an interesting topic.

I agree that salary should be paid.

However, suppose you have this scenario:

A Corporation sponsors a DB plan that covers the 100% owner (only employee). Suppose he has always worked more than 1,000 hours and always will. Furthermore, he established his high 3 year average prior to adopting the DB plan. In the first year of the plan there were no profits to pay him a salary as his pension contribution is high. Is he considered an employee if he draws $0 salary? Can he accrue a benefit? I would think reasonable compensation should include compensation and deferred compensation.