CFO switching to 1099--Would you let him keep paying his loan?

[TPAJake]

CFO has been W2 for years & has a loan outstanding, now he's switching to 1099. Company wants to withhold & keep making his repayments, but 1099 Employees aren't eligible for the Plan. What would your answer be?

[Lou S.]

Should be in the Participant Loan Program.

Are other terminated employees given the option to continue repaying their loan after separation from service or does the loan become due and payable?

[TPAJake]

Its a takeover & nobody has been able to find a copy of the loan policy/program. Other loans would become due & payable upon termination, but in this case the company is still in control of his pay going forward. I agree with the CFO that this is a distinction, but it still smells funny to me

[Doghouse]

If there is an affiliated service group relationship between the plan sponsor and the CFO's business, perhaps the latter could adopt the plan? He would not be a 1099 employee (if there is such a thing) of his own entity.

[Lou S.]

Its a takeover & nobody has been able to find a copy of the loan policy/program. Other loans would become due & payable upon termination, but in this case the company is still in control of his pay going forward. I agree with the CFO that this is a distinction, but it still smells funny to me

I agree. But the distinction in this case to me is an HCE is being given the option to continue making loan payments and not take taxable income while NHCEs are not given the same option.

Sounds like a BRF failure to me.

[RatherBeGolfing]

Its a takeover & nobody has been able to find a copy of the loan policy/program. Other loans would become due & payable upon termination, but in this case the company is still in control of his pay going forward. I agree with the CFO that this is a distinction, but it still smells funny to me

I disagree. No such thing as a 1099 employee, so the CFO would be a terminated employee just like any other employee.

I agree. It is a BRF failure, and a failure to follow the terms of the document.

Bottom line, can't be done in the manner proposed.

[austin3515]

Who's in the Doghouse!!

He made a very interesting observation, which is that if his "business' " primary purpose is providing management services to 1 other business, then it is an Affiliated Service Group (the Management Company variety) and he would be employed.

Of course no one has mentioned it, but if this CFO is earning his paycheck exclusively from providing CFO services to this one "client" (aka his employer) then he is a w-2 employee and they could be in hot water if challenged. For example, why the sudden change in status? But that is really the CPA's call, but I always mention to clients in these situations.

[ESOP Guy]

I know it is off topic a bit but it has been brought up. I worked for the IRS back in the '80s and one of the things we were trained in was looking for 1099-R people who were in fact employees.

This is NOT something you can just agree to do. Too many people think if a person signs a contract saying they agree they are an independent contractor then they are one. That isn't how the law works in this area. You are either an employee or an independent contractor if you meet the definitions of either one under the law and no agreement can say otherwise.

[Belgarath]

I agree, but I'd note that the "definitions" are in fact frequently turning on "facts and circumstances" and it can sometimes be a difficult call - as evidenced by substantial litigation in this arena. Certainly I agree that someone other than the TPA should be making this determination!!

[hr for me]

agree that there is no such thing as a "1099 employee" -- either a w-2 employee or an independent contractor getting a 1099. And agree that those laws need to be followed carefully. If his job isn't truly changing and he's not going to also work in competing positions/doing work for other clients, it's going to be hard to argue that he shouldn't be classified as an employee.

[401king]

If your firm is just now taking over the Plan, then could you not allow all terminated participants the option to repay their loan after termination? And then just follow the statutory loan default terms.

[TPAJake]

Thanks for all the info, you all gave me plenty of ammo! I told him no based on BRF & the employee/contractor issue is his to figure out. The plan is huge, audited, blue collar with way too many loans--No way I'm allowing term'd participants to keep paying. The recordkeeper doesn't allow direct bill on loans anyway.