Covered Employee

[Andy the Actuary]

A not-for-profit organization maintains a foundation which is a separate legal entity. Employees of the foundation are on contract and are paid by the sponsoring organization but foundation employees are treated as independent contractors and paid via 1099. I.e., each is a self-employed individual.

The sponsoring employer maintains a defined benefit plan.

Can the sponsoring employer cove the contract employees under the pension plan with the contract employees' 1099 income counted as compensation for pension purposes?

The sponsoring employer does not want to alter the 1099 arrangement so paying the employees W2 is not an acceptable option.

[Guest Matthew Gouaux]

If the foundation's "employees" are self-employed individuals and not employees of the foundation or the sponsoring organization, they cannot be covered by the sponsoring organization's qualified plan because a qualified plan cannot cover non-employees without violating the exclusive benefit rule under IRC 401(a)(2).

On a related note, you might suggest that both organizations seek legal advice regarding the classificaiton of these workers. Worker misclassification seems to be a hot issue recently.

[Andy the Actuary]

If the foundation's "employees" are self-employed individuals and not employees of the foundation or the sponsoring organization, they cannot be covered by the sponsoring organization's qualified plan because a qualified plan cannot cover non-employees without violating the exclusive benefit rule under IRC 401(a)(2).

On a related note, you might suggest that both organizations seek legal advice regarding the classificaiton of these workers. Worker misclassification seems to be a hot issue recently.

Thanks for your thoughts. I categorically had believed "no," but sometimes am surprised. For example, I know there are certain rules about excluding leased employees if certain whoops are not jumped through. I appreciate the exclusive benefit rule reference since as a propeller head, I focus on number crunching and lunch and not the underlying legal issues. And yes, BenefitsLink is only the first stop. I previously obtained the client's authorization to submit this issue to the plan's legal counsel.

[John Feldt ERPA CPC QPA]

You may want to look at Derrin Watson's book "Who's the Employer". Chapters 2 and 3 talk about self-employed individuals and common law employees, including how and why it matters for plan purposes. Chapter 4 covers uncommon employees.

[jpod]

Can those "self-employed" people who are interested adopt the plan and create a multiple employer plan? If a DC plan, contributions made by the non-profit on their behalf first go as a top line item on the Schedule C, subject to self-employment tax on Schedule SE, but then the individual takes the income tax deduction on page 1 of 1040. Much more complex, I suppose, if its a DB.

[Andy the Actuary]

Interesting music coming from the Ipod. It is a DB Plan and it was established before 1/1/1989 but as a single employer plan. Since that time another member of the controlled group has adopted the plan.

Question: If it became a multiple employer plan, would it be able to use consolidated funding or is the exemption not for plans in existence before 1/1/1989 but rather for multiple employer plans in existence before 1/1/1989?

Even if this works, not sure of the funding and tax mechanics and doubtful that the sponsoring organization would want to pay for the added complexity. But, you never know.