Independent Contractor - Prior Service

[52626]

Employer acquires a company under an asset purchase

There were several individuals that were paid 1099 by the prior employer.  Under the new employer these employees will be paid w-2 wages.

Eligibility for the 401(k) and match is immediate. The question is regarding vesting and if the new employer can recognize service for vesting purposes. 

If the employer credited service for vesting, he would have to list each individual as a sole proprietor, correct? The new employer would need to get the effective date of the sole proprietorship in order to determine the years of service.  Does this make sense??  Are there any issues with giving vesting service credit to this group??

Thanks

[Bird]

3 hours ago, 52626 said:

If the employer credited service for vesting, he would have to list each individual as a sole proprietor, correct?

I think so.

3 hours ago, 52626 said:

The new employer would need to get the effective date of the sole proprietorship in order to determine the years of service.  Does this make sense??

Depends on exactly what they want to do.  If someone had his own business for 10 years and worked as an IC for this company for 2, do they want to credit 10 or 2?  I might do language along the lines of "...service while operating as independent contractor John Doe performing services for XYZ Co. shall be recognized."

3 hours ago, 52626 said:

Are there any issues with giving vesting service credit to this group??

Shouldn't be if they are NHCEs.  Could be if they are HCEs (but could they be HCEs without prior year comp history and no ownership...?).

[Luke Bailey]

52626, you may well be able to amend the plan to give these folks as much service as you want, up to 5 years, assuming the group is nondiscriminatory. Check out the 1.401(a)(4)-5 regs regarding imputed, past, etc. service.

[Bird]

13 hours ago, Luke Bailey said:

52626, you may well be able to amend the plan to give these folks as much service as you want, up to 5 years, assuming the group is nondiscriminatory. Check out the 1.401(a)(4)-5 regs regarding imputed, past, etc. service.

It looks to me like the 5 years is a safe harbor (e.g. if there are HCEs involved) and would not apply if there are only NHCEs, do you agree?

[Luke Bailey]

5 hours ago, Bird said:

It looks to me like the 5 years is a safe harbor (e.g. if there are HCEs involved) and would not apply if there are only NHCEs, do you agree?

Bird, I think so. You can always use the "facts and circumstances" test in preceding paragraph (2) instead of the 5-year safe harbor in paragraph (3), and would presumably always or always satisfy "facts and circumstances" if all beneficiaries of amendment NHCEs.