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Answers are provided by S. Derrin Watson
Excluding Outside Salespeople
(Posted August 29, 2003)
Question 258: We are considering a Safe Harbor 401k/Profit Sharing Plan for our employees. We have a few part-time outside sales employees who get paid directly through our payroll (commission only). Can we exclude them from the 3% contribution?
Answer: Perhaps. Depending on your situation, the answer might be:
- You must exclude them from the plan;
- You may exclude them from the plan; or
- You cannot exclude them from the plan.
First, determine whether these salespeople actually are your common law employees. In responding to your question, I will refer to my book, Who's the Employer?. (Subscribers can click to view online the text of references to sections in the book.)
The fact that you pay the salespeople by commission could indicate that they are independent contractors. However, depending on other factors, they might be employees. WTE 2:21. The IRS no longer considers whether a worker performs services at the employer's worksite as a key factor in determining employee status. WTE 2:30. In a modern working world, that is the only sensible position. I, for example, am an employee of SunGard Corbel, but I have yet to set foot in either its Jacksonville, FL headquarters or the Denver, CO office with which I most closely work.
On the other hand, the fact that the payroll records reflect that the salespeople are employees would be a factor showing the intent of the parties and hence the nature of the relationship. WTE 2:23. But this is not determinative. There have been cases involving outside salespeople who have been carried on the payroll who have nonetheless been determined to be independent contractors.
The bottom line: it is immpossible to determine employee status based on a three sentence question. Instead one must carefully examine and weigh all the relevant factors to determine if these salespeople are your employees or are independent contractors. WTE 2:12.
Suppose you look (or your attorney looks) at all the factors and determines that the salespeople are independent contractors. If so, you must exclude them from the plan, or the plan will violate the exclusive benefit rule. WTE 2:41.
If you determine they are employees, the next question is whether the plan must cover them. You could certainly amend your plan to state that outside salespeople shall not participate. But you still would have to test the plan for coverage under IRC 410(b), and the salespeople would count against you in running that test.
If they are employees and you choose to (or are required to) allow them to make deferrals into the plan, then the plan also must provide the 3% nonelective contribution for them. Both the existing 401(k) rules and the recently issued proposed regulations are very clear that the safe harbor contribution must go to all nonhighly compensated employees who are eligible to defer under the plan.
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.)
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