Question 49: Can a statutory employee have his or her own retirement plan?
Answer: With one exception, the answer is yes.
By definition, statutory employees are persons who are not common-law employees of the business they serve. They must meet several specific code requirements, such as performing substantially all the work themselves, not having a substantial investment in facilities, having a continuing relationship with the company, and falling into one of 4 categories: agent-driver, full-time life insurance salesperson, home worker, or traveling or city salesperson. The law requires businesses to withhold FICA taxes from statutory employees, but not income taxes.
Because they are not common-law employees, statutory employees are not eligible to participate in plans sponsored by the company that pays them. To cover them would violate the exclusive benefit rule of the Internal Revenue Code.
Although statutory employees receive a Form W-2, the income reported there is trade or business income that should be reported on Schedule C, against which any expenses of the statutory employee's business are deducted. After all, because they are not common-law employees, they are independent contractors.
As such, they have "earned income" and are regarded as "self employed individuals" under Code section 401(c)(1). This allows them to set up their own retirement plans.
There is one exception. Code section 7701(a)(20) says that full time life insurance salespersons are deemed to be employed by the insurance company whose policies they sell for retirement and health plan purposes. This means
For a complete discussion of statutory employees, with numerous examples, see chapter 3 of my book, Who's the Employer?.
- they can be covered under the insurance company plan; and
- they cannot set up their own plan.