Subscribe Now!
Free Daily News, Jobs, Webcasts, Discussions
Post and Distribute
Your Jobs
ARPA News
ARPA Webcasts

Featured Jobs

Director of Finance

NYCDC of Carpenters Benefit Funds
(New York NY)

Defined Benefit Retirement Plan Administrator

Benefit Associates, Inc.
(Telecommute / Huntington Beach CA)

Benefit Associates, Inc. logo

Product Support Consultant

ftwilliam.com part of Wolters Kluwer Legal & Regulatory
(Telecommute)

ftwilliam.com part of Wolters Kluwer Legal & Regulatory logo

401(k) Consultant

TPS Group
(Telecommute / North Haven CT)

TPS Group logo

DC Administrator

MGKS
(Telecommute / Phoenix AZ)

MGKS logo

DB Retirement Plan Administrator

The Nolan Company
(Telecommute / Overland Park KS)

The Nolan Company logo

Retirement Plan Administrator

Premier Plan Consultants
(Telecommute / San Diego CA)

Premier Plan Consultants logo

Manager, 5500 Team

401K Generation
(Altamonte Springs FL)

401K Generation logo

Director of 401(k) Implementation, Core

Human Interest
(Telecommute / Mill Valley CA)

Human Interest logo

Employee Benefits/Health and Welfare Attorney

Miller Johnson
(Telecommute / Grand Rapids MI / Kalamazoo MI / Detroit MI)

Miller Johnson logo

401(k) Implementation Manager

Human Interest
(Telecommute / San Francisco CA)

Human Interest logo

DB/DC Administrator

Primark Benefits
(Telecommute / Burlingame CA)

Primark Benefits logo

Retirement Plan Consultant / Relationship Manager

Associated Pension Consultants
(Chico CA / Sacramento CA)

Associated Pension Consultants logo

Defined Contribution Analyst

The Benefit Practice
(Stamford CT / Maitland FL)

The Benefit Practice logo

DC Retirement Plan Administrator

The Nolan Company
(Telecommute / Overland Park KS)

The Nolan Company logo

Free Newsletters

“BenefitsLink continues to be the most valuable resource we have at the firm.”

-- An attorney subscriber

Mobile App image LinkedIn icon
Twitter icon
Facebook icon

BenefitsLink > Q&A Columns >

Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Excluding Workers by Classification

(Posted June 4, 2002)

Question 192: In Q&A 190 you give an example of Zeke, a retired executive on a consulting agreement. He's paid as in independent contractor but he's still legally an employee. Would it be possible for the employer to define an acceptable class of employees to be excluded from the qualified plan so that Zeke would be considered as having changed to an excluded class of employment? If so, what might the class be called?

Answer: Absolutely he can be excluded. There is no reason why the plan couldn't provide that anyone who receives a 1099 and not a W-2 from the company is excluded.

I say that because of a Technical Advice Memo written by Mr. Richard Wickersham of the IRS. Although it was never issued a formal number, it is still a valid analysis of the situation. I've posted it in the Who's the Employer Reading Room. Let me quote a few of the pertinent paragraphs:

Many employers have amended their retirement plans in the wake of this decision in an attempt to protect their plans against the uncertainty that may be created by retroactive determinations that workers are employees rather than independent contractor. Typically, such amendments provide that workers engaged as independent contractors, or workers not paid through the payroll system, will not be eligible to participate in the plan, even if the classification as an independent contractor is later determined to be erroneous.

* * *

As indicated previously, employers have legitimate reasons to exclude from plans workers who were not engaged as common law employees. If the worker is in fact, an Independent [sic] contractor, the employer would be precluded from covering the individual under its plan, absent some specific statutory rule, such as the individual's status as a based employee under section 414(n) of the Code. Even if the worker is not, in fact, an independent contractor, the employer has a legitimate business interest in knowing the cost of the worker's compensation package at the time the worker is engaged.

A tax-qualified retirement plan that conditions participation on status as a common law employee need not define that term, for the standard articulated in Darden will be applicable absent some special definition in the plan. With respect to the case at issue, section 410(a) of the Code does not preclude a qualified plan from excluding retroactively reclassified employees from participating in the plan. A worker's status is based on facts and circumstances. Making a determination as to whether a common law employment relationship exists is not always straightforward. An employer, making the initial classification of a worker's status, has legitimate concerns in protecting its plan from the consequences of retroactive reclassifications if a mistake is made. Nothing in section 410(a) prevents an employer from addressing these concerns though preventative measures similar to the plan language provided by the taxpayer.
Of course, common law employees excluded through such a clause will be counted in determining whether the plan satisfies IRC sections 410(b) and 401(a)(26). However, assuming you can pass those hurdles after the exclusion, there is no problem with excluding workers who are not actually on the company's W-2 payroll.

For further discussion of this TAM and the exclusion of employees, see Chapter 2 of my book Who's the Employer.


Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.


Copyright 1999-2017 S. Derrin Watson
Related links:

(restricted access)

(restricted access)

© 2021 BenefitsLink.com, Inc.