Statutory Employee

[frizzyguy]

I am working with a financial advisor who sells insurance for one company. He is classified as a "statutory employee". He also sells other products but I think insurance and annuities are his principal business activity. (Code Sec. 401©(1))

He receives payment through both a W2 and a 1099. Because of the 1099 he files a Schedule C and pays SE Tax. He is under the assumption (he is going to get back to me) that only his W2 compensation is eligible for the insurance company's retirement plan.

Here is my question: Can he open up a DB plan for his 1099 income if this income is not eligible for the other plan?

If he got this 1099 income for any other profession than a full-time insurance salesman (at least I think he qualifies as such) this wouldn't be so confusing. Has anyone seen this situation before? I would really appreciate any help I can get. I have researched and researched but haven't found anything too concrete. I was told by an accountant that he thinks it's okay but his confidence, or lack their of, didn't make me feel better about it.

Of course, so I can stay ahead of Mr. Rigby, I will be following up anything I tell the client with "but you'll want to check with an ERISA attorney on that".

[AndyH]

Where the heck is Ned Ryerson when you need him?

[SoCalActuary]

I believe you are out of luck on this fact pattern.

He needs to contact his home office legal department / benefits department.

But the fact that all income goes thru the carrier leaves him in a position that he can't claim independent income.

[frizzyguy]

On his 1099 income which flows through his Schedule C he is responsible for both sides of the SE tax. If this had been any other type of industry I would feel confident it's okay. I find guidance in several places saying that a statutory employee can set up a plan on their earned income except full time insurance salesmen. The logic behind that is because there is an exception allowing them to be in the insurance companies plan where generally statutory employees earned income isn't eligible. But if it's not being used for the plan, then what? This is way too much thinking for a Friday afternoon...

I do really appreciate the idea of going through his home office/legal department. Also, that groundhogs day reference is awesome. "Ned, Ned Ryerson <PUNCH>".

[GBurns]

Are you cetain that he gets BOTH the W2 and the 1099 from the SAME company?

[Belgarath]

I say he cannot have a plan on his 1099 income from his parent company. He's considered an employee under IRC 7701(a)(20) which allows him to be covered under the insurance company's plan, and there's no option for him to elect out of that.

So my vote is no, no plan on the 1099 income you discuss.

[frizzyguy]

Are you cetain that he gets BOTH the W2 and the 1099 from the SAME company?

That's a good question, they may not be the same company but they definitely are in the same controlled group. It could be an umbrella company.

[frizzyguy]

I say he cannot have a plan on his 1099 income from his parent company. He's considered an employee under IRC 7701(a)(20) which allows him to be covered under the insurance company's plan, and there's no option for him to elect out of that.

So my vote is no, no plan on the 1099 income you discuss.

This is the direction I am leaning as well. Oh well, it was worth investigating.

[Bird]

QUOTE (Belgarath @ Apr 2 2012, 08:53 AM) *

I say he cannot have a plan on his 1099 income from his parent company. He's considered an employee under IRC 7701(a)(20) which allows him to be covered under the insurance company's plan, and there's no option for him to elect out of that.

So my vote is no, no plan on the 1099 income you discuss.

This is the direction I am leaning as well. Oh well, it was worth investigating.

I think you might be giving up too easily. If the 1099 income is not covered by the insurance company plan (and I don't know that that's been determined), I don't see why you couldn't set up a plan for it. Just because he is a statutory employee for some income doesn't mean the rest is excluded - the fact that it is coming from a controlled group doesn't mean anything, IMO. (I admit to thinking on logical grounds, which is dangerous in this business, but it doesn't make sense that legitimate earned income should be ineligible for any retirement plan coverage at all.)

[frizzyguy]

That logical approach, in this case, could get you in trouble. I definitely think that makes sense and was the way I was originally leaning. Here is why I think it's not allowed from a logic standpoint. "Statutory Employees" are generally not allowed, under any circumstances, to participate in an employers retirement or heath plans. They made one exception to this rule allowing full-time insurance salesmen to participate in an employers' benefit plan without violating the exclusive benefit rule. I believe this exception can be found in 7701(a)(20).

I did a lot of research and another conclusion I came across was that a full-time life insurance saleperson is not considered an employee of himself or herself under the 'Self-Employed Individuals Tax Retirement Act of 1962.' I found several summaries of this but couldn't find the actual act:

http://ir.lawnet.fordham.edu/cgi/viewconte...amp;context=flr

There are also some references to full-time insurance salesman in IRC 3121.

If anyone has anything more concrete, I'd love to hear it. (Especially if it says they can set up a plan.) I would love to be able to offer these plans to these types of employees but won't do so unless I find something concrete.

[SoCalActuary]

For those outraged over the unequal treatment of this income, remember this: the insurance agents lobbied to be treated as employees so they could get employer-sponsored health insurance.

They can't claim independent status and also health care eligibility.

[Bird]

My point is that someone can be a statutory employee for one source of income and an independent contractor for another. I'm actually pretty confident of that, but hey, I've been wrong before.

[SoCalActuary]

My point is that someone can be a statutory employee for one source of income and an independent contractor for another. I'm actually pretty confident of that, but hey, I've been wrong before.

In most fields, you would be right. But company-linked insurance agents sued to get health coverage as employees several years ago. It cost them the ability to claim that income as "their own business". So you need to understand the exceptions when making generalizations.

[Bird]

It wasn't apparent from the thread that the 1099 income is covered under a benefit plan, but I'll defer to your apparent knowledge and conviction.

[david rigby]

Are you cetain that he gets BOTH the W2 and the 1099 from the SAME company?

That's a good question, they may not be the same company but they definitely are in the same controlled group. It could be an umbrella company.

Is controlled group the relevant question? (Don't know, just asking.)

[jpod]

Statutory employees are by definition people who are not common law employees, so I am not seeing the linkage between someone being a statutory employees for IRC purposes and also being entitled to health insurance under the terms of a group policy (unless the state insurance law compels the insurance companies to treat IRC statutory employees that way). Actually, I think the only (or perhaps merely the very most significant) reason they are statutory employees is because there was too much self-employment tax not being paid.

[SoCalActuary]

http://www.irs.gov/pub/irs-pdf/p15a.pdf

See page 5. It explains that insurance agents are employees because of a statute, so they are statutory employees.

They must meet specific conditions for this to apply. So the original post should follow up with those rules to see if they are relevant for their client.

[jpod]

Maybe we are saying the same thing, but in order to be a statutory employee they must not be common law employees. They are TREATED as employees for some very limited purposes under the IRC only (unless a state law has borrowed the concept), most notably FICA/Medicare.

[frizzyguy]

I was told that they are statutory employees and not common law employees. He instructed me that there is no gray, every practice they do with their agents is to ensure that they stay statutory.