Part time ee to independent contractor & vesting/partial termination?

[TPApril]

Company has 3 employees:  owner and one other work full time. other works part time (under 1000 hrs/yr).

All participant are in the PS (no 401k) plan and part timer receives PS every year (eligibility is simply last day worked)

Owner wants to convert part time employee to independent contractor status and not allocate additional PS to part timer.

Part timer is 40% vested due to initial years of employment, so I'm curious if there is a partial termination situation here that would result in him becoming fully vested.

[CuseFan]

Maybe, you have a 33 1/3% reduction in active participants via action by the employer. I would lean yes.

However, it's not just flip a switch and this person magically goes from employee to contractor. Unless something changes in the relationship this person could still be deemed an employee.

[Peter Gulia]

About whether a severance-from-employment of the third worker results in a partial termination, consider whether amending the plan so that participant is immediately 100% vested might be less expensive than the legal advice the plan’s sponsor/administrator might get to support why the severance-from-employment (if one assumes the change from employee to nonemployee) does not result in a partial termination.

This is not advice to anyone.

[CuseFan]

Very good "not advice" @Peter Gulia

[rocknrolls2]

Your client can't just slap an "independent contractor" label on an employee and expect that the federal and/or state gov't will respect it. To make the label stick, your client should retain competent counsel to guide them through the steps needed for a worker to be treated as an independent contractor under the law. Counsel should instruct your client on how to change the working relationship in a way that it would be respected.

Regarding the impact if an employment relationship is defensibly recast into an independent contractor one, the former employee likely would need to be fully vested and whether the former employee can be considered to have a severance from employment is a valid concern.

 

[Artie M]

Assuming this person is an employee...   why not just leave them an employee and add a 1,000 hour allocation condition prospectively?  or excludable employee classification.... but would have to pass 410(b), nondiscriminatory classification rules (wouldn't pass ratio so probably have to look at average benefits testing)?  These by pass the contractor classification issue.  also assuming no gateway or cross-tested allocation issues (think not but just in case)