Former employee becomes independent contractor for the same company

[katieinny]

A former HCE of a company has recently retired. However, he has been hired as an independent contractor by the same company. He insists that he controls his own time and work and would not be considered an employee. He wants to set up his own retirement plan based on his 1099Misc income. At this point he doesn't provide his services to any other company, but that's not to say he won't at some point. This question must come up fairly often, so I'm hoping somebody has prior experience.

[Guest taxesquire]

He can do it. Doesn't matter whether he's a sole proprietor or a company.

You alrady know the main issue, which is whether he really is an indep contractor.

With a standard profit sharing he can easily get $40k+ into it. There might be an issue if he wants to get $15k+ in there as deferrals, too. I forget what the limits are (they seem to change every year !!!), so my #s might be off.

He would be a candidate for a DB if he wants to generate significant benefits, too.

[katieinny]

Yes, I understand that the answer really depends on whether he is truly an independent contractor. I've been doing some reading and I think our best advise is to tell him to do everything he can to make sure the IRS would think so if they decided to check him out. Then, and only then, should he set up a retirement plan of his own. Thanks for your reply.

[masteff]

Might try to gauge just how much he really wants to fund this year and what % of earnings that represents.

Sounds like the perfect candidate for an SEP IRA. Only slightly more limiting that a qualified plan, 25% of comp up to $45K. But then zero reporting burden. See IRS Pub 560 http://www.irs.gov/pub/irs-pdf/p560.pdf