Contribution for non-employee?

[Guest forohonek]

A client has told me that he's been advised that he may make a 2007 contribution to the company defined benefit plan for a person who received no W-2 for 2007. Does someone have a cite to support this?

A little discribtion: This is a sole-proprietorship run by the husband. His wife was an employee in prior years, through 2006. She was not paid during 2007/2008. He is now funding the defined benefit plan for 2007 (his tax return is on extension until 10/15/08) and he tells me that per his discussions with pension folk (not his paid advisor though, who is currently not available), that he can make a contribution for the non-employee / wife.

[david rigby]

Did she accrue a benefit during the PY?

Does the actuarial valuation show a contribution is needed under IRC 412?

(P.S. It's a DB plan, not a DC plan.)

[Andy the Actuary]

Sounds like we're talking about how much of a contribution is reflected on Schedule C (allocated to wife) and how much on 1040. What actuarial cost method has been used historically for allocating contributions for Schedule C purposes? For example, is it an immediate or spread gain formula? It's quite possible the valuation report will not disclose this answer.

[Guest Sieve]

I'm not a DB guru, but you might continue funding for a non-employee, mightn't you, even though there was no benefit accrual in a subsequent year? If so, then the answer to forohonek is that a protion of the contribution represents amortized funding for the benefit already accrued for wife, not funding for a new accrual.

[JAY21]

The fact that the wife didn't draw any compensation in a small family business doesn't necessarily mean she wasn't an employee for the year. Compensation is not the only proof of employment in these cases as the small plan actuarial audit cases proved years ago. Also, if the formula is based upon say a high-3 compensation average, and she worked the requisite hours required (even though not paid) she would have an accrual for the year.

[Andy the Actuary]

The fact that the wife didn't draw any compensation in a small family business doesn't necessarily mean she wasn't an employee for the year. Compensation is not the only proof of employment in these cases as the small plan actuarial audit cases proved years ago. Also, if the formula is based upon say a high-3 compensation average, and she worked the requisite hours required (even though not paid) she would have an accrual for the year.

Excellent, forgotten point: An hour of service is an hour for which an employee is paid or entitled to pay (blah, blah, blah)

[Guest Sieve]

Jay -- The OP, however, talked (at the very end) about potentially making a contribution "for the non-employee / wife." You're suggesting, rightly, that the wife can be an employee without being paid--if, of course, the wife provided some kind of services to the business. Maybe the "non-employee" status of the wife needs to be re-examined.

[Guest forohonek]

Jay -- The OP, however, talked (at the very end) about potentially making a contribution "for the non-employee / wife." You're suggesting, rightly, that the wife can be an employee without being paid--if, of course, the wife provided some kind of services to the business. Maybe the "non-employee" status of the wife needs to be re-examined.

Well, being a small business that does not necessarily maintian weekly employee time records, whether the "non-employee / wife" actually provided some number of hours of service or not is something that one needs to accept the verbal representations made by the business owner. I did not ask him. I suppose his pension advisor will inform him of the correct answer, opps I mean will ask him

Can someone give me a cite or reference for this "hours worked without being paid issue"? Isn't this is violation of the labor laws, and subjecting the taxpayer to IRS and State penalties for non-payment of employment taxes and not reporting taxable wages? Not to mention not meeting the minimum wage laws?

[Andy the Actuary]

Can someone give me a cite or reference for this "hours worked without being paid issue"?

DOL Reg. 2530-200b-2(a)(1)