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)   

[johncerten]

This is an interesting situation. A partial termination analysis would depend on the specific facts, including the plan document, the number of participants affected, and whether the change from employee to independent contractor is considered a severance of employment under the plan and applicable rules.

Since the part-time employee has been receiving profit sharing and has an existing vested balance, it would be important to determine whether this transition is a legitimate change in employment status or effectively a termination. If the employee is no longer eligible to participate, the reduction in active participants may need to be reviewed for possible partial termination implications.

I would recommend reviewing the plan provisions and consulting with a qualified retirement plan professional or ERISA counsel before making the change.

[CuseFan]

If the PTEE never worked 1000 hours, can amend the plan to apply 1000-hour YOS eligibility and apply to everyone as of an allowable date which could serve to kick out this employee. However, such amendment would likely be a modification to the pre-approved document language (most provide continued participation) and could also trigger a partial termination. Since PS-only there are no LTPT EE issues. 

Seems like a lot of trouble to avoid PS for a single PT EE.

[Artie M]

I guess I failed to respond to this but it seems like full vesting should just be given.  Why wouldn't the employer want to vest them?  Seems like their issue would be the ongoing contributions not partial term.