Spouse's Unpaid Service

[austin3515]

Wife works for husband Docotor doing books for 10+ years, but never was on the payroll. Wife's involvement is clearly documented by workflow, emails, etc., so the existence of her service would be verifiable on audit. Well, now the plan is safe ahrbor, so the wife now wants to get paid so she can defer the max as well.

Plan requires 1 Year of Service.

Option 1: Wife is eligible from day of compensation because we can count all of her pre-pay check service. This is based on the fact that she was "entitled to compenation for services rendered" even though none was actually paid.

Option 2: Because the wife never actually received any compensation, and most hours of service crediting rules reference "hour of service for which compensation was paid" or soemthing to that affect, wife must satisfy eligibliy treating day 1 as the first day of her paycheck, delaying her entry for at least a year.

[ignore the fact that wife should have been on the payroll all along, and probably was not to avoid the social security tax by tacking it on to the Doctor's paycheck, whcih was above the wage base - that is someone else's BIG problem - not mine! The question presented to me is solely "can she participate from day 1"].

So which option is it? Option 1 or Option 2?

[rcline46]

Option 1. Volunteer service does not count toward eligibility.

[austin3515]

You mean Option 2, right?

[rcline46]

YES OPTION 2. Sorry, must be one of my (many) backward days.

[masteff]

What about the "independent contractor vs employee" rules? Could you use those to pull her in immediately?

[austin3515]

Please elaborate... This sounds interesting even though I have no idea what you mean!

[Belgarath]

I'm not knowledgeable in minimum wage laws, but it seems to me that I heard before that Federal minimum wage laws (and many states for that matter) don't apply to spouses. If that's the case, then she's been "eligible" right along, but just has had zero compensation. So it wouldn't be a problem to have her start immediately - in fact, it would be required absent a valid exclusion.

[Bird]

I'm not knowledgeable in minimum wage laws, but it seems to me that I heard before that Federal minimum wage laws (and many states for that matter) don't apply to spouses. If that's the case, then she's been "eligible" right along, but just has had zero compensation. So it wouldn't be a problem to have her start immediately - in fact, it would be required absent a valid exclusion.

I think that's correct.

[austin3515]

That makes me very happy - but do you have anything that I can put in my file, in defense of that position?

[david rigby]

One-time amendment to use a more generous definition of eligibilty?

[PensionPro]

How does the document define "year of service"? If 1000 hours, does she satisfy that requirement?

[Belgarath]

Austin - as I said, I'm not knowledgeable in this arena. A quick internet search confirms that! It seems pretty clear that on a state level, many states don't require minimum wage for spouses. But I'm not at all sure that generally applies at the federal level, particularly if FLSA applies. Sorry I can't give you a better anser - hopefully someone else here will know.

[rcline46]

And Austin understands that an amendment would be VERY discriminatory in effect and is not an option.

[david rigby]

And Austin understands that an amendment would be VERY discriminatory in effect and is not an option.

Maybe. No information in above posts about NHCEs.

[DMcGovern]

Have you checked your document's definition of "eligible employee"? I think that may help here - but may not be the answer you are looking for. Ours (Corbel) states, "an individual shall not be an Eligible Employee if such individual is not reported on the payroll records of the Employer as a common law employee. In particular, it is expressly intended that individuals not treated as common law employees by the Employer on its payroll records and out-sourced workers, are not Eligible Employees and are excluded from Plan participation......" It does reference their non-standardized document, so this language may not apply in all Corbel document cases. You may want to ask your document provider directly on this.

[masteff]

FLSA does not apply if the employer qualifies for what's generally referred to as the "family business exception" under the "enterprise" definition of the Act.

http://www.dol.gov/whd/regs/statutes/FairLaborStandAct.pdf

Any establishment that has as its only regular employees the owner thereof or the parent, spouse, child, or other member of the immediate family of such owner shall not be considered to be an enterprise engaged in commerce or in the production of goods for commerce or a part of such an enterprise.

So that begs the question of what other employees does the company have?

As Belgrath said above, if FLSA does not apply then the spouse would not be subject to the minimum wage law.

[DMcGovern]

And Austin understands that an amendment would be VERY discriminatory in effect and is not an option.

Maybe. No information in above posts about NHCEs.

If it is just him and (possibly) the spouse, why would they put in safe harbor option?

[austin3515]

It's not just the owner and the spouse, there are other employees.

And I like what someone was posting about the Eligible Employee definition (we are on the same document) however, it does not seem to reference what you would do in the event that such a person is ever hired.

How could this not be addressed somewher?? Am I the only who comes across this issue with some frequency?

[DMcGovern]

It's not just the owner and the spouse, there are other employees.

And I like what someone was posting about the Eligible Employee definition (we are on the same document) however, it does not seem to reference what you would do in the event that such a person is ever hired.

How could this not be addressed somewher?? Am I the only who comes across this issue with some frequency?

I think that the spouse would become an eligible employee, effective as of the date he/she first is on the payroll. And would then have to satisfy the eligibility requirements from there.

[rcline46]

In the ASPPA IRS Q & A session some 2 or 3 years ago this issue came up and the IRS response was, in simple terms, tough nuggies.

[masteff]

Please elaborate... This sounds interesting even though I have no idea what you mean!

Independent contractor vs employee can be a big deal. Most famously, Microsoft got sued by a bunch of contractors who were denied benefits. Of course it's a bit messier since you're dealing w/ a spouse who was paid nothing for her services. But if your goal is to include the spouse immediately, it might serve your purpose.

http://www.irs.gov/businesses/small/articl...d=99921,00.html

http://www.irs.gov/pub/irs-utl/emporind.pdf

Oh, and I assume since it's a doctor that this is some sort of corporation and not a sole proprietorship?

[austin3515]

Does anhyone have that ASPPA Q&A handy?

[ESOP Guy]

It's not just the owner and the spouse, there are other employees.

And I like what someone was posting about the Eligible Employee definition (we are on the same document) however, it does not seem to reference what you would do in the event that such a person is ever hired.

How could this not be addressed somewher?? Am I the only who comes across this issue with some frequency?

For what it is worth you are correct. You would think this is addressed some place. But it isn't and this issue seems to come up alot.

What I have and most of the people I have worked with over the years have solved this issue is look to other parts of employement law/practice. For example, did this Dr. ever set up his wife with the other reqiured or optional hallmarks of an employee. For example, do the other employees including the Dr. all have benefits given to all employees? If she did not have them that would seem to indicate they really didn't treat the wife as an employee. I will admit most of the time it isn't a spouse of an owner this question comes up so some of this is less relevant.

Honestly, it doesn't sound like they ever treated here as an employee and now you are looking for a way to rationalize doing so. The problem is if you are wrong you just let a HCE into the plan too early. On the other hand if you recommend to keep her out for a year and you are wrong you have keep a HCE out of the plan too long. The bigger risk is in letting this person in too early, not too late. The IRS is going to challenge too early, not too late.

[Kevin C]

We've had this come up several times. I've always considered it addressed by the plan's definition of hour of service. Our plans have always said something like this:

Performance of duties. Hours of Service include each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. These hours will be credited to the Employee for the computation period in which the duties are performed.

If they work and don't get paid, no hours credit. That makes it pretty hard to get credited with the 1,000 hours usually needed to become a participant.

[austin3515]

Much as I hate to say it, I agree with Kevin C (nothing personal, just not the answer I want). If you look at my OP, I wasn;t sure if the "entitled to payment" language could be exploited in our favor. But of course I also agree with ESOP guy - discrminiation is definitely going to be on the IRS' agenda if this became reviewed.

[Guest Sieve]

The owner can't have it both ways (although they generally want it that way) -- i.e., can't keep the spouse off the payroll (so that the owner is paid all income for the family and saves FICA otherwise payable by & on behalf of the spouse), but have the spouse considered an employee who is paid and therefore has h/s.

I agree with others: no pay or entitlement to payment = no h/s (that's basically straight from the regs).

[ESOP Guy]

By the way if you say she should be in the day she first gets paid because she had the years of service and hours already how does that change prior year's testing?

After all you are saying she worked >1,000 in those years, she had 1 YOS, just no comp. Should she have been a zero on the ADP test, a person on coverage?

One might reply that would tend to make the test better, which is true. But you didn't put her on those years because you didn't think she was an employee those years. Now you are saying she was.

I think you are opening bigger can of worms then you think if you let her in.

Sorry, you just got a stream of thought written here.

[masteff]

Can someone explain to me how ya'll are deciding the "entitled to payment" language does not apply? Especially given that she's now elected to actually receive such payment? Nothing has changed from the past to now, other than her deciding she wants into the plan, so if she's entitled to payment now, how was she not entitled in the past?

[david rigby]

If it is just him and (possibly) the spouse, why would they put in safe harbor option?

Oops. Of course you're right. My mistake for reading too fast.

[masteff]

By the way if you say she should be in the day she first gets paid because she had the years of service and hours already how does that change prior year's testing?

After all you are saying she worked >1,000 in those years, she had 1 YOS, just no comp. Should she have been a zero on the ADP test, a person on coverage?

One might reply that would tend to make the test better, which is true. But you didn't put her on those years because you didn't think she was an employee those years. Now you are saying she was.

I think you are opening bigger can of worms then you think if you let her in.

Sorry, you just got a stream of thought written here.

I'd think this could be covered under who's excluded from the plan. Of course I don't deal w/ testing so no idea how excluded persons affect those results.

[Guest Sieve]

masteff --

I think "entitled to payment" means you will be paid, but just haven't been paid yet.

So, an employee paid once a month, on the 5th, is considered to have h/s in the prior month when the h/s have been completed but before the employee has been paid for those hours. For example, if you have 990 h/s going into December, you will have a y/s even though December's hours aren't paid until Jan. 5. Or, if you defer half of your pay into a non-qualified plan, you still have earned h/s because you are entitled to payment for the hours that you performed (albeit later).

If you are receving health benefits, then I can see the argument that you are being "paid" for those hours although you are not being paid in cash for working. And, I can see an argument that an owner who decides not to take any pay in order to pay other employees also has completed h/s--and the same might apply to the spouse of the owner. So, this situation is probably a fact-specific determination.

If prior service is awarded in this case, this spouse is already fully vested, too.

[K2retire]

What if it were NOT a spouse?

I ran across a case today with a rehired NHCE. Rehire date is 12-27-2010. Comp and hours zero, presumable due to timing of payroll. Does she count as a zero in the ADP/ACP test?

[Guest Sieve]

The "entitled to payment" language from the DOL h/s regs is for h/s purposes only. It does not impact comp.

[DMcGovern]

Austin, which Corbel document is the client on (Standardized, Non-Std, etc)? I will be happy to pose your question to Corbel to see what their answer is

[Tom Poje]

K2Retire

if you have really good document language it will be apparent how to handle. generally you wouldn't count the person in 2010 unless you specifically checked otherwise.

Sample Corbel language not sure what other documents say

Administrative delay ("the first few weeks") rule. 415 Compensation for a limitation year shall not include, unless otherwise elected in Section 2.2 of this Amendment, amounts earned but not paid during the limitation year solely because of the timing of pay periods and pay dates. However, if elected in Section 2.2 of this Amendment, 415 Compensation for a limitation year shall include amounts earned but not paid during the limitation year solely because of the timing of pay periods and pay dates, provided the amounts are paid during the first few weeks of the next limitation year, the amounts are included on a uniform and consistent basis with respect to all similarly situated participants, and no compensation is included in more than one limitation year.

[D Lewis]

How about a special amendment that brings in the wife and one or more NHCEs at the same time?

Not sure how many NHCEs you need in this case without the demographics, but if they want the wife in so bad, it's the price to be paid to get what one wants.

[austin3515]

We're on Corbel non-standfardized EGTRRA prototype, though I presume this is covered in the Basic Plan Document...

[DMcGovern]

We're on Corbel non-standfardized EGTRRA prototype, though I presume this is covered in the Basic Plan Document...

Ok, so the language I quoted before would apply in your case. (Eligible employees do not include outsourced workers and workers that are not common law employees. Common law employees must be on the payroll records.) BTW, this language is in the document due to the Microsoft case that was mentioned by someone else in this topic.

So again, I don't think the wife is an eligible employee until she is on the payroll and must meet the eligibility requirements from the date she first earns wages from the Employer.

[Lou S.]

I'm going form memory here and unfortunatly don't have anything writen to go on so I could be wrong. But I agree with the no pay = no hours. I seem to recall this question coming up at more than on ASPPA meeting at the IRS responce from the podium was always, no the employee is not considered an employee. Again, I'm going on my memory of conferences and have nothing written to back it up so take that for what it is worth.

[PensionPro]

An excerpt from the EOB:

Caution: IRS has taken adverse position in an audit. We have been informed of an IRS audit on a defined benefit plan that counted service for years that the business owner’s wife performed services to the company but took no salary. The IRS took the position that the noncompensated years of service could not be counted, interpreting a noncompensated period of service to be a "gifting" of the services to the company and, thus, not "entitled to payment" within the meaning of the DOL regulations. This resulted in a disallowance of deductions for contributions to the pension plan that were based on what IRS felt was an overstated accrued benefit. The nondeductible contributions were also subject to excise taxes under IRC §4972.

[Jim Chad]

Here is another thought. Pay periods vary. We have all seen weekly, biweekly, semi-monthly and monthly payroll periods. Could sh be paid annually, this week?

[Belgarath]

PensionPro - could I trouble you to provide the EOB reference? Thanks!!

[austin3515]

If you have an on-line version, do a search for the word "gifting" - it is the only hit in the entire 10,000 page document!

[Belgarath]

Sorry - I have the book edition, not the on-line.

[austin3515]

Definition of Hour of Service, Part D.

PS Many many thanks for this perfectly on point site!!!

[Belgarath]

Thanks!

[Guest Sieve]

Do you think the IRS would take the same position if the 100% owner of the business did not pay himself/herself for a year or 2 in a legiitimate effrort to keep the buisness afloat & pay other employees? And, what if, in the same vein, spouse was also not paid, again simply to make certain that the business had the appropriate support and could pay other employees/expenses?

The intent, of course, would be to pay both when the business turned the corner and could afford to. How could you deny a y/s in that case?

[Belgarath]

We were just discussing that question this morning. Of course, we don't know the circumstances in the plan audit in question, but lots of times the cost of litigation, even if you believe you will prevail, exceeds the gain if you prevail (winning the battle but losing the war.) So just because an audit was closed on this basis doesn't necessarily mean it is correct, or that the IRS would prevail if challenged in court. I agree with you that it is most unreasonable to deny a YOS in such a situation. Might be a good issue to bring up at ASPPA conference.

[Bird]

We were just discussing that question this morning. Of course, we don't know the circumstances in the plan audit in question, but lots of times the cost of litigation, even if you believe you will prevail, exceeds the gain if you prevail (winning the battle but losing the war.) So just because an audit was closed on this basis doesn't necessarily mean it is correct, or that the IRS would prevail if challenged in court. I agree with you that it is most unreasonable to deny a YOS in such a situation. Might be a good issue to bring up at ASPPA conference.

I agree. I think it's fair to say that the conservative position is not to try to count unpaid hours, and the IRS is unlikely to ever say "no, no, no, Mrs. Owner should have come in in year X-1." But that doesn't mean it is right.

[DMcGovern]

I just received a response from Corbel (Robert Richter) to my question about the determination of "eligible employee". The microsoft language is in there to keep out people that are independent contractors. This language relates to the nonstandardized and volume submitter documents because it would be okay to exclude them (but is subject to 410(b) testing). You can't have exclusions in the standardized doc that would violate 410(b).

(My interpretation:)

Standardized document - would include anyone that performs services for the employer (regardless of their compensation)

Nonstd & Vol Submitter - language excludes independent contractors (performs services but is not on the payroll)

He further states that compensation does not matter. The issue is whether the person performed services for the employer. If so (even if no comp), the service counts. If no service, no time with the employer. It would become a matter of how many hours she worked each year. According to Robert, "Self-employed individuals are treated as employees for plan purposes so I'd say the prior service counts......If she's doing the same job, etc., then it means to me that all her service counts - but when she wasn't paid she couldn't get any benefits (due to 415 - not b/c she was in an excluded class)."

In thinking about this response, it wouldn't matter what document you are on - the wife would have been included in 410(b) when she met the age and service requirements. She just would not be benefitting until she has compensation (unless she is specifically excluded in some way).

Personal note: Seems like our census requests need to ask for anyone performing services, not just those with hours and comp!

I wrote this kind of fast - hope it makes sense!