Retirees, Working but not Much

[Mr Bagwell]

I need some ideas...

Have a lawyer practice 401k plan that is starting to have retirees.  I think the ownership group would like to NOT give the safe harbor and profit sharing to the retirees.  It sounds like the retirees will be doing some work, just not a lot of work and will be paid via the Employer in normal fashion.  I suggested maybe considering the retirees as 1099 employees. But, ER is not sure.

I am just starting the brain storm stage.

Any ideas? 

Can the plan exclude the retirees the plan year after "retiring"?  I hate to use the word termination, because they are not terminated, they just work way less now.

I don't think the plan could exclude by name... could be wrong.  I don't see where a class would work, but maybe....

Thanks

[BG5150]

Can't not give them the SH.  For the PS, use a new comp formula and just give them nothing. (if you pass testing)

 

Is the plan Top Heavy?

[Mr Bagwell]

Good thought.

Sorry, should have said they are using 2 tier integrated.  Not that it makes a difference, but they have been doing integrated for decades...

Thanks BG

[Larry Starr]

Umm.... they are NOT retirees if they are still working! They have simply gone to a more part time status.  You have already been told they have to get the SH.

As to making them 1099 employees, that is a very bad recommendation and something that can get your clients in big trouble.  If they are employees, they are employees.  You cannot MAKE THEM 1099; they either are independent contractors or they are not. In your case, they have been employees and they still will be employees and will have to be treated as such.

[Mr Bagwell]

Point taken Larry.

I didn't really like the term retirees either, but that is how they are described by the employer.  I know they didn't really terminate, they just work on their own schedule now.

I was hoping there was a little potential wiggle room with the 1099 employees.  I really doubt these employees are being told what to do.  They are probably just using the firm as a resource to do cases they want to do and the timeline they want to do work.  I agree with your assessment of the "they are either independent contractors or they are not".

Just looking for options....  If I was able to come up with a scenario to accurately exclude these employees like BG recommended via new comp, I'm all ears. 

I bet the plan would pass testing even with these excluded from the profit sharing.  But what kind of language would I suggest to exclude Normal Retirement Age waivered employees?  I wouldn't suggest removing the exclusion altogether.

Thanks

[chc93]

I'm assuming the safe harbor is the 3% to all.  What about changing to safe harbor match... if these "retirees" don't defer, no safe harbor match.  Then new comp for PS contribution, and zero PS to them (assume passing the test).  But safe harbor match will mean that ALL participants who do not defer will "lose" the 3% safe harbor, if that's an issue. 

[BG5150]

How many hours do they work?  You can put in a condition for PS that people must work at least x hours (not more than 1,00) to get the PS.  If they work 600 hours, make the cutoff 750.  Would they be the only ones affected, though?

[Mr Bagwell]

CHC,

That's a possibility.

[Mr Bagwell]

BG,

The hours condition gets blown up by the normal retirement age waiver to conditions.  So it wouldn't matter if they worked 200 hours a year, according to plan doc, they would get the PS.

I'm thinking a whole plan change would be necessary to get where they might want to go.

Thanks for the help!

[ESOP Guy]

I have an ESOP that has a provisions that allow several things:

1) Once a person reaches Normal Retirement Age and terminates (ie retire) they can start receiving distributions.

2) However, if they return after such work they can still keep receiving distributions

3) As long as they work <1,000 hours they can not receive a contribution for the year.  The plan says you can only get the waiver of conditions for retirement once.  You don't have to give retirees a waiver. 

They did this because they have a few position that are highly skilled but they only employ one person in that position as they aren't a very large company.  So when this person goes on vacation they bring the retiree back for those week(s).  The retiree would only agree to earn a week or two's worth of wages if he can keep getting his annual ESOP installment.  So it has been a win/win for all so far. 

So far no one has challenged this as an objective classification. 

 

[Mr Bagwell]

Interesting ESOP.

The waiver once.....hmmm....  maybe that's the winning ticket.

Thanks

[K2retire]

In a law firm setting, people with this type of arrangement are often shareholders or partners. Could you exclude HCEs from the safe harbor contributions and adjust the PS for the rest?

[PFranckowiak]

Could you give them a job title and exclude all under that title?    Would have to pass coverage, but you could exclude them by a group.   I think that they probably have a few clients that they still do work for, but don't take on new ones.   Also how are you tracking hours?  Do they work in the office or do they work from home??

[Luke Bailey]

All of the above answers seem to have useful information. We deal with this situation all the time. You can easily create a category and assign these folks to it and give them whatever type of contributions (e.g., elective deferral only) you think appropriate, as long as you pass coverage, nondiscrimination, and top-heavy. If they are owners and it's a small firm, then top-heavy would be your biggest issue until they stop being owners, but you could (again., assuming you pass coverage) put these folks in a separate plan. An inflection point occurs when someone who used to be a partner goes to nonpartner status, because as a partner you could specially allocate their contribution expense to them, whereas once they become an employee or IC the firm has to pay for the contributions. Note that whether a senior non-full-time attorney is "part-time," "retired," "of counsel," etc. could have repercussions on malpractice and other insurance coverages. The ABA has a manual on "of counsel" status, and such folks can be employees (W-2), independent contractors (1099), or owners (K-1).

[stephen]

Two items to keep in mind:

1) None of these changes can be made to the plan until the next plan year since this is a safe harbor plan.

2) Because of ADEA and OWBPA I'd be careful excluding folks based on age.  It may not be an issue but I would not overlook this.

"The Age Discrimination in Employment Act (ADEA) requires employers to offer equal benefits to older workers and younger workers -- but that doesn't always mean the benefits offered must be exactly the same.  The Older Workers Benefit Protection Act (OWBPA) amended the federal Age Discrimination in Employment Act (ADEA) to provide guidance on the ADEA requirement that the benefits employers offer to older workers must be equal to the benefits offered to younger workers."

https://www.employmentlawfirms.com/resources/employment/age-discrimination-benefits.htm

 

[Luke Bailey]

Typically this sort of situation arises in a partnership with respect to partners, so ADEA would not apply. If you are dealing with employees, or former partners who are now employees, then I think (but I doubt there's a whole lot on it, and if there is I could be wrong) that as long as your classification of the folks (senior counsel, part-time employees, etc.) is bona fide, the classification would not be viewed as a subterfuge to avoid ADEA. Obviously, if you said "Everyone 66 or over does not get matching," you could have a problem for over-65 employees.