Limits on Total Compensation to Former Employees

[rg1344]

I have a similar question to one posted earlier. This is in reference to a single employer, defined benefit plan. A former employee who is currently receiving a pension under the aforementioned plan will be brought back to help with training as a consultant for a month or two. The employee retired last year. The employer and the former employee have entered into a consulting agreement, whereby the consulting work is not considered reemployment under the plan. The question is, are there limits on the total compensation a former employee who is participating in the employer's pension plan may be paid? What is considered compensation? Do bonuses received at the time of retirement (a holiday bonus given to all employees) count as compensation?

[K2]

Compensation is whatever the plan defines it to be, typically w-2 or withholding wages.  Unless this person is paid as an independent contractor on a 1099, they are likely to have compensation.  

 

That said, there is no threshold amount that they can be paid and have them be excluded from the plan, and where if you cross that threshold, you have to bring them in.  Rather, they are a re-hire and would get a suspension of benefits notice in all likelihood, and absent the consulting agreement they could potentially accrue additional benefits upon their reparticipation in the plan.  

Unless the plan specifically excludes bonuses, it is included in compensation.  If excluded, the plan's definition of compensation would need to be tested under 414s in most cases.

 

[My 2 cents]

Just wondering - you wouldn't pay a holiday bonus to a consultant/independent contractor, would you?

Standard caveat:  I am not a lawyer, but...

The person is either an employee (with what they are being paid reported on a W-2) or an independent contractor (with what they are being paid reported on a 1099 of some sort).  If the former, then they must be treated as reemployed based on what the plan specifies (but if they never work 40 hours in a calendar month, no benefits can be suspended and they would presumably accrue no additional benefits).  If the latter, then they would not be treated as an employee or, under the plan, as having been rehired, no matter how much work they do and how much they get paid.  Facts and circumstances would come into play if the compensation approach could be construed as a pretext.

[Belgarath]

2 minutes ago, My 2 cents said:

Just wondering - you wouldn't pay a holiday bonus to a consultant/independent contractor, would you?

You might. The cleaning service, the garbage collection folks, anyone with whom you contract who does a great job, and you wish to express your appreciation for service above and beyond the call, etc.

[My 2 cents]

38 minutes ago, Belgarath said:

You might. The cleaning service, the garbage collection folks, anyone with whom you contract who does a great job, and you wish to express your appreciation for service above and beyond the call, etc.

Granted, but it probably won't be in the same ballpark as the holiday bonuses paid to employees!

[AndyH]

I always wondered who tipped garbage collectors.....

(I guess this is my contribution to the board for this week)

[rg1344]

It probably wasn't clear from my question, but the person received a holiday bonus and severance pay upon retiring at the end of 2016. the employer wants to bring the person back on as a consultant in the summer.

[david rigby]

In my observation, there is a difference between "compensation" (ie, paid to an employee) and "fee" (paid to a non-employee, including a consultant).  If it's a bona fide consulting relationship, what fee that person receives should not be relevant to a qualified plan.  Or do I misunderstand the question?