Unpaid spouses service

[Guest PAUL DUGAN]

We have a situation where the spouse of the owner has worked for the company for 20 years without compensation (worked full time 40 hours a week). As of /1/1/2000 she started drawing a salary. What is her service for eligibility, vesting, accrual?

[Erik Read]

How is an hour of service defined in the document? Most that I have seen state "an hour worked in which the individual is entitled to compensation".... so IMHO I would say she has no prior service with the company - this is the first time she's been "entitled" to compensation for her services.

[Guest PAUL DUGAN]

EREAD Thank you - you gave me the answer I wanted. However I think my read is different than yours.

I when back and the reg on service. It did say "an hour worked in which the individual is entitled to compensation"

not an hour for which they "recieved compensation". I believe that a person that handles all accounts payable, accounts recievable, answers all phone calls, all personell matters for 6 employees, etc. for 40 hours a week is "entitled to compensation".

This is same reasoning used to give a self-employed individual sevice in a year the partnership losses money.

[AndyH]

Paul, a couple of people in my office just wrestled with this same issue, in relationship to how to determine average comp in a DB plan (for 415 purposes)for such a person.

For what it's worth, they (chief actuary and chief legal counsel) concluded that an "employee" should at least earn minimum wage, therefore the spouse was not an employee. This was just an off-hand conclusion, nothing researched.

I'm not sure if I agree with that or not, but it's the opinion of two people I respect, and it's somewhat consistent with ERead's comments.

Also, I mentioned on another thread or board that at the IRS Q&A session at ASPA's 10/2000 annual conference, the answer provided to a question about how to treat a partner with negative earned income in a general tested ps/k plan was that he/she was not in the tests (not a zero); does this mean not an employee, I wonder in the IRS' eyes? I don't know if that helps, and I don't recall any cites being given, but I presume there might be something supporting this answer that might affect your situation.

I'd like to hear comments from attorney's who might have some info on the definition of "employee" that might be helpful.

[Erik Read]

I believe it goes to how you want to defend your actions under audit. Personnally - partners in a partnership that loses money - I would still consider "earning" money. They usually have a monthly draw equivalent to a salary, and at the end of the year, the partnership show's "-" K-1 earnings for tax purposes. I would still say that you should grant them a year of service for vesting.

Minimum wage is a good measure, but I know many a "spouse" that does recordkeeping or works hours for the firm but draws no income. The other "spouse" draws the earnings.

If you don't want to credit her the service - just be sure you have your ducks in a row to explain under audit - if the plan gets audited (that's the golden rule!)

Good Luck.