Household employee

[Gary]

I have a client who has his own small business with about 20 employees. I believe it is in the biotech industry.

He sent a note saying he has a household employee and will want to discuss how this employee s hould be treated for purposes of his pension plan.

The first thing I need to determine is is the employee is an includable or excludable employee for coverage purposes.

My initial reaction (before I revisit and research this subject matter) is as follows:

1. if it is a 1099 employee than she would be excludable

2. if it is a W-2 employee than she might be non-excudanble, depending if she met the 21 & 1 and 1000 hours

3. if it is a leased employee than again it may potentially be non excludable, though I believe such an individual does not even become an employee until she completes one year of service as a leased employee.

What comments are out there on this matter?

Thank you.

[PensionPro]

Since household employees are not part of a trade or business, they are not part of a controlled group. For the same reason contributions made to their accounts are not deductible. However, Section 637 of EGTRRA waives the excise tax.

[Guest Sieve]

Following up on PensionPro's resposne, the household employee therefore is not considered for coverage testing.

For what it's worth (when you discuss a pension plan for the household employee), contributions to a retirement plan established for household employees are exempt from the excise tax on nondeductible contributions only if the plan is a SIMPLE IRA or SIMPLE 401(k). (IRC Section 4972©(6)(B)).

[Gary]

Regarding the comment that "household employees are not part of a trade or business, they are not part of a controlled group"; is information on this fact found in section 414? Somewhere else?

Thanks.

[Guest Sieve]

IRC Section 414© requires that entities under common control be "trades or businesses". The regulations--even the regs under IRC Sectin 162 relating to trade or business expenses which are deductible--do not specifically define what a trade or business is, but case law clearly has established that a trade or business is an activity engaged in primarily for profit, thus excluding such things as living expenses & hobby expenses. So, an employee hired to keep up your personal residence, or one of your personal residences, would not be working as part of your trade or business, and therefore not under common control with the employer's real business (& the household employee could not be part of a controlled group, because the owner's household is not a corporation).

[PensionPro]

414(b) Employees of Controlled Group of Corporations. —For purposes of sections 401, 408(k), 408(p), 410, 411, 415, and 416, all employees of all corporations which are members of a controlled group of corporations (within the meaning of section 1563(a), determined without regard to section 1563(a)(4) and (e)(3)©) shall be treated as employed by a single employer. With respect to a plan adopted by more than one such corporation, the applicable limitations provided by section 404(a) shall be determined as if all such employers were a single employer, and allocated to each employer in accordance with regulations prescribed by the Secretary.

414© Employees of Partnerships, Proprietorships, Etc., Which Are Under Common Control. For purposes of sections 401, 408(k), 408(p), 410, 411, 415, and 416, under regulations prescribed by the Secretary, all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer. The regulations prescribed under this subsection shall be based on principles similar to the principles which apply in the case of subsection (b).

[D Syrett]

FWIW, I had this fact pattern come up about 5 to 10 years ago on a proposed new DB plan. We ended up retaining a well-known pension attorney to wade through the facts. He ended up breaking the people into the two groups: employees of the business and househould employees - based and the facts and circumstances.

In the end, the client elected not to proceed with the plan due to the employee costs projected.