Employee terminated as W-2 and rehired as 1099

[Jakyasar]

Hi

Combo plan, CB+DC.

An HCE was employed in 2020 as a w-2. Excluded from CB but included in the DC.

Now I am informed that he terminated as an employee on 1/2/2021 and became 1099 employee for 2021. He had $0 W-2 for 2021 however they make 26k deferral plus non elective SH on his behalf for 2021.

How is he treated for all coverage and non-discrimination testing? How is his deferral/SH to be corrected?

Thank you for your comments.

[Mike Preston]

He isn't. Give it back, all of it, it is a mistake in fact.

[Jakyasar]

So not in testing at all, correct?

All other monies are being returned, I was told, I am not the TPA, just doing testing.

[ESOP Guy]

They are claiming he isn't an employee by putting him on a 1099.

So he can't be treated as an employee for plan purposes and isn't on the tests.  

[CuseFan]

18 hours ago, Jakyasar said:

1099 employee

No such thing - he is either an employee and paid via W-2 (or if has ownership then possibly K-1) or an independent contractor paid via 1099 in which case he is not eligible for any portion of the qualified plans. Notwithstanding, if IRS or DOL subsequently rules this person is a common-law employee and not a contractor based on facts and circumstances, then you might need to include in testing even if the terms of the plan continue to allow for his exclusion from participation. If he is and continues to be above HCE threshold that is unlikely to cause a problem.

[Jakyasar]

I am testing the plan both ways and make sure that I pass either way with no contributions (always like to cover any future surprises - I do not always believe that 1099s are always IC's). After all it is the CPA/sponsor telling me what this person's employment status is, nothing I can do on this. Of course, the future issue would be if the IRS determines to be an employee, how to correct all missing contributions. 

[ESOP Guy]

The whole 1099 employee is typically something I mention but didn't' this time as it is clear the original questioner has no control over the determination. 

As an observation back in the '80s my first job was as an IRS Revenue Agent.  If we saw a situation where a person's job basically didn't change but they went from employee to IC we would challenge the change the vast majority of the time.   To us it was simple.  If there were an employee and there was no meaningful change they are still an employee.  For some reason a lot of people have gotten it in their head this is something you can decide and negotiate.  The employee status determination is a legal determination.  The rules aren't always the clearest but there are tests and if they say they are an employee they are.

Like I said none of this is your control so I am mostly just on my soap box.  I will get off now. 

[david rigby]

Be careful.  In addition to ESOP Guy's caution, your spidey-sense should be tingling.  Ask questions to find out what else is going on.  IMHO, there is a 99% probability some other issue exists.  If you need some prompts, consider questions about ownership, relationship(s) with other HCEs, change (or no change) in responsibility/duties.  

[Jakyasar]

Oh, believe me it is tingling but I get the response that it is IC, not my determination. I can only let them know what I think the issues are, other than that, not much I can do but rely on what the CPA/Sponsor tell me.

Thank you for all the cautionary information.

[CuseFan]

Good to test both ways. Plan can exclude people paid via 1099 whether they are truly common law employees or contractors, but the question is whether they can be  excluded from testing as not employees.

[BG5150]

How could they be part of testing if they do no have any plan compensation?

The remuneration they get on the 1099 is not earned income or W2 or anything that would fall under 415 or withholding wages.

[Mike Preston]

3 minutes ago, BG5150 said:

How could they be part of testing if they do no have any plan ?

The they get on the 1099 is not earned or W2 or anything that would fall under 415 or withholding .

Adopted by "1099-employee"'s employer? So, it is a MEP.

[ERISA1]

Might this be an Affiliated Service Group under IRC 414(m)(5)?  I doubt the former employer or new consultant would want this outcome.but it could put a spin on all of the responses in this thread.