Question 84: A trucking company has only two employees. The truckers are treated as independent contractors and payment to them is reported on a Form 1099. Is it possible to set up a 401(k) plan covering the truckers, even though they're not paid via a Form W-2?

Answer: The issue is not whether they are paid by a 1099 or a W-2. The question is whether they are really employees, as your first sentence indicates, or really independent contractors, as your second sentence indicates. They could be either. The IRS audit guidelines for employee/independent contractor issues give several examples relating to the trucking industry. These examples show that, depending on the facts, a trucker could have either status.

If they are employees as a matter of law, then the company is wrong to be giving them 1099 forms and could be liable to the IRS for unpaid withholding taxes. Employee status generally is not a matter of choice between the parties, but rather is a matter of analyzing the situation; if the situation shows they are employees, then the choice of the parties to pretend they are not employees won't help anything.

If they are employees as a matter of law, then the company can obviously set up a plan for them, just as it could for any other employees.

If they are independent contractors as a matter of law, then you have two choices:

1. Each trucker can set up his own plan. As self-employed individuals, they are treated as their own employers, or

2. Each trucker can co-sponsor a plan set up by the company.

However, if they are independent contractors as a matter of law, then the company cannot set up a plan for them unless the truckers join as co-sponsors. It will be a multiple employer plan requiring multiple Schedule T filings (with the Form 5500). By contrast, plans set up by the individual truckers would qualify for filing 5500-EZ and no filing at all if the assets are small enough. If the company tries to set up a plan without the truckers co-sponsoring it, and the truckers really are independent contractors, then you have a violation of the "exclusive benefit rule," which would disqualify the plan.

Could you have a company that says, "For plan purposes they're employees but for payroll tax purposes they're independent"? Sure, you could have this situation arise. But it would be wrong. The IRS would argue that the fact that you have a plan for them is evidence that they truly are employees, and start charging for the payroll taxes. In this situation, the standards for the two are essentially the same. Don't try it.

The bottom line here is that you need to make certain of their status. If it is in doubt, have it reviewed by an attorney. Too much money is at stake to leave it to chance, or to leave it to be merely what the truckers hope it is.

For more information on employee/independent contractor issues, including several examples relating to the trucking industry, 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.