Question 194: We have employers who hire employees in the Amish religious order. They execute the appropriate forms exempting them from certain government laws and regulations and of course do not participate in the qualified retirement plan. I am unable to locate information in ERISA and the IRC concerning how to handle their lack of participation. How should they be considered?
Answer: Treat them as you would any other employee.
IRC 1402(g) says that members of certain religious faiths (called "religious sects or divisions thereof" in the statute) can be exempted from paying self-employment tax if they file Form 4029 with the IRS and have it accepted. Moreover, IRC 3127 says that if both the employer and the employee file the form, then the employee is exempt from FICA and Medicare tax (both the employer and the employee portions). If the forms aren't filed by both employer and employee and accepted by the IRS, FICA and Medicare tax still apply with full force.
Form 4029 affirms that the individual is a member of a religious sect or division thereof and, because of his religion, he is morally opposed to accepting benefits from public or private old age, disability, retirement, death, or health care insurance. The individual must waive all rights to be covered by the Social Security System. The sect or division thereof must have been in existence since 1950, be conscientiously opposed to public or private insurance, and provide for "a reasonable level of living for its dependent members."
In your case the employer has someone who has affirmed that as a matter of moral principle and faith he is opposed to participating in private as well as public retirement plans. Excluding such an individual from a plan would be quite appropriate as an accommodation to his principles.
However, filing this form does not change (even for payroll tax purposes) the common law employer-employee relationship between the parties. Additionally, there is absolutely nothing in IRC sections 410(b) or 410(a)(26) that allows us to exclude such individuals as we determine whether a plan passes the coverage and participation tests.
While a plan obviously could choose to exclude people who object to plan participation as a matter of conscience, those individuals are nonetheless counted in the ratio percentage test, just as though they had been excluded for less noble reasons.
Interestingly, an EGTRRA amendment to IRC 401(c) allows self-employed individuals who have filed Form 4029 to establish a qualified retirement plan, SEP, or SIMPLE, notwithstanding the filing of the form.
For more on employee exclusion, see Chapter 2 of my book Who's the Employer?.