Spouse's Unpaid Service

[GMK]

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?

For what it's worth, perhaps intent is a key player in such cases. If the company did not have adequate resources to keep the business going AND pay the owner and spouse during the lean years (something one could determine by looking at the company's books), then you probably have a case to grant years of service. The intent was to pay them, but the money was not available yet.

In the OP, the doctor did not forgo his salary to keep the business alive, and it sounds like they chose not to pay the wife but could have paid her. Even ignoring the possibility that maybe the intent was to avoid SS, this sounds more like the gifting example.

[austin3515]

OK, here's what you do:

Write a letter to your client with arguments for and against immediate eligiblity, and then have them tell us how they want to proceed

[Belgarath]

The more I think about this, the more wrong it seems. If minimum wage laws apply, then the spouse is absolutely "entitled to payment" and the plan should be fine (and the IRS is just plain wrong - now, the employer may have all kinds of trouble for violating minimum wage laws, but that's a separate issue.) If they do NOT apply, and a spouse simply decides not to take any salary, (or agrees not to take a salary, if spouse isn't an owner) I still think the spouse is "entitled" to payment. One can posit all kinds of situations - suppose the spouse is a shareholder in an S corporation, and decides to take no W-2, but takes it all as pass-through income. Can the IRS seriously argue that the spouse/owner is not "entitled to payment?"

I realize that the apparent situation in the audit was for a non-owner spouse. Wish I knew more about the particular facts of the audit situation, because I suppose I could be doing the IRS an injustice here - the "facts" as relayed to Sal might not be all that accurate.

Austin's solution appears to be the only safe (for the TPA) approach.

I'd love to see the outcome if this were ever litigated - as long as I wasn't paying for it...

[ESOP Guy]

Maybe the lesson here is if minimum wages laws don't apply always pay the wife $1/year. You then have paid service.

[Kevin C]

One can posit all kinds of situations - suppose the spouse is a shareholder in an S corporation, and decides to take no W-2, but takes it all as pass-through income. Can the IRS seriously argue that the spouse/owner is not "entitled to payment?"

Isn't there a reasonable compensation issue there?

I also wonder if there would be a consistency issue with the company tax return. They would be treating the person as not being an employee when determining FICA, but treating them as an employee for determining the plan deduction. I'm not an accounting person, but it doesn't seem right that you could do that.

[masteff]

I realize that the apparent situation in the audit was for a non-owner spouse. Wish I knew more about the particular facts of the audit situation, because I suppose I could be doing the IRS an injustice here - the "facts" as relayed to Sal might not be all that accurate.

Thus underlining the danger of relying on anecdotal evidence from one single audit. One anecdotal audit does not make IRS policy.

I still say use Microsoft to say the person gets service immediately upon entry after changing from an ineligible to eligible class. That was after all the whole jist of the Microsoft case and precisely why the plan has language relating to that class of person.