Is he an employee?

A new solo medical practice established this year.  A 401k plan was created this initial year as well.  The doctor has no employees at this time.  The doctor's spouse is working during this initial year to help establish the practice.  The doctor would like to pay the spouse for services and the spouse would then like to deposit a portion of that compensation into the plan.

With no other employees, the doctor does not currently have a payroll service and would like to not have to use one until employees are hired, likely next year.

Without using a payroll service, Is there a way for the doctor to pay her spouse for (legit) services to the new practice so that he can be considered an employee?  If he is paid as a 1099 employee, can a plan document be written to include him as an eligible employee for the 401k plan, which would allow him to contribute 401k/Roth/after-tax?

Thank you for any comments

I'm as cheap as they come but not paying a payroll service to properly get the spouse on the books is just dumb.  I suppose you could get away with paying the spouse on a 1099 and then having the spouse's "company" as an adopting employer.   Consider whether the spouse (and the doc for that matter) will be eligible without a requirement of less than one year and what that might mean for future employees and their entry dates.

Surely the doc has a CPA, right? Most of them can handle this and that's where I would send them.

The document was written that anyone employed on January 1st of the current year would immediately participate and after that, a 1 year wait.  So we can get the doctor and her spouse in the plan for the current year.  I advised that they check with the CPA, but if the only answer is that he can be a 1099 employee, does that prevent him from participating in the plan?  Still checking on that.

Well, that seems to be a stupid answer to me.

Isn't there a simple payroll software program out there that can do this?  I bet there's even an app.

Something like Intuit?

Does Quickbooks do that?

Even if the cost was $1,000 for the year, wouldn't it be worth it if the spouse could get $10,000 into the 401(k) piece of the plan?

1 hour ago, Santo Gold said:

The document was written that anyone employed on January 1st of the current year would immediately participate and after that, a 1 year wait.  So we can get the doctor and her spouse in the plan for the current year.  I advised that they check with the CPA, but if the only answer is that he can be a 1099 employee, does that prevent him from participating in the plan?  Still checking on that.

 

Sorry pet peeve but it comes up on this board all the time.   There is no such thing as a 1099 employee.   An employee is reported on a W-2.   An independent contractor is reported on a 1099.   I would add this isn't something that can just be decided.   Either a person is an employee per the rules (they are vague rules but there are rules) or they are an independent contractor. 

I also can't help but note that the last time I checks (which was many years ago) most bookkeeping software for small businesses have the ability to compute a paycheck, withholding.... and a W-2 at year end.  

I just can't imagine this is the reason that stops the spouse from being made an employee. 

Heck, years ago when I was church treasurer I generated "payroll" for 2-3 employees on a spreadsheet, sent the w/h in quarterly, then generates W-2s and 941 at year-end using Social Security Business on-line. It was very easy, no cost, and did not take a lot of time. Add it to the spouse's job responsibilities and do things the right way.

Agree that there are very simple solutions for payroll issues and that there is no such thing as a "1099 employee".....ESOP guy is 100% correct!  

3 hours ago, BG5150 said:

Does Quickbooks do that?

Yes they have a service level that includes payroll.

13 hours ago, Lou S. said:

Yes they have a service level that includes payroll.

Yeah we used it in our tiny office.  And being a TPA, we are used to doing the painstaking stuff associated with the filings so it worked.  The user still has to do a fair amount of reporting and my gut feeling is that this doc is not a good candidate for that service.

18 hours ago, Santo Gold said:

The document was written that anyone employed on January 1st of the current year would immediately participate and after that, a 1 year wait.  So we can get the doctor and her spouse in the plan for the current year.

I'm sure your software permits you to do that but doesn't it give you pause as far as being discriminatory?  I may be in the minority but I think that comes under the catchall "pattern of amendments" language that effectively results in discrimination.

1 hour ago, Bird said:

I'm sure your software permits you to do that but doesn't it give you pause as far as being discriminatory?  I may be in the minority but I think that comes under the catchall "pattern of amendments" language that effectively results in discrimination.

The OP said there are currently no employees.  Would you have the doctor and spouse establish the plan then have to wait to participate?

2 hours ago, BG5150 said:

Would you have the doctor and spouse establish the plan then have to wait to participate?

No

4 hours ago, Bird said:

I'm sure your software permits you to do that but doesn't it give you pause as far as being discriminatory?  I may be in the minority but I think that comes under the catchall "pattern of amendments" language that effectively results in discrimination.

It only becomes discriminatory if they hire an NHCE during the new 1 year waiting period where you've effectively allowed immediate eligibility HCEs and a 1 year wait for NHCEs.

1 minute ago, Lou S. said:

It only becomes discriminatory if they hire an NHCE during the new 1 year waiting period where you've effectively allowed immediate eligibility HCEs and a 1 year wait for NHCEs.

"only"?

I don't disagree but isn't that going to be the common, in fact contemplated, scenario?

2 minutes ago, Bird said:

"only"?

I don't disagree but isn't that going to be the common, in fact contemplated, scenario?

I don't know the facts. Maybe they contemplate hiring employees sometime in the future, maybe not. But assuming the have dual entry plan and plan on hiring employees before 7/1/2022 I would say the plan design is problematic.

34 minutes ago, Bird said:

No

That design is quite common for a new employer. Obviously if the employer has been around long enough, it's not an issue.

What would be your solution if not this?

18 hours ago, Bill Presson said:

What would be your solution if not this?

I would use an eligibility requirement that brings in the owner and use it going forward.  It doesn't have to be immediate, it could be 3 months or whatever.  I am very uncomfortable using "everyone employed on plan inception" when the only person(s) employed is (are) owners.  If that's not discriminatory on practice I don't know what is.

6 hours ago, Bird said:

I would use an eligibility requirement that brings in the owner and use it going forward.  It doesn't have to be immediate, it could be 3 months or whatever.  I am very uncomfortable using "everyone employed on plan inception" when the only person(s) employed is (are) owners.  If that's not discriminatory on practice I don't know what is.

So if Johnny starts a business with no employees and wants a retirement plan, he has to wait to satisfy whatever the service requirement is going to be going forward?

Maybe I'm way out of it, but I've been doing this for 35+ years and that's way more conservative than I've ever known anyone to be. I just don't see it as an issue.

Now, if the owner did this and then had employees who had to wait for 21/1 and then he wants to do another waiver to bring in a spouse or child? I would completely agree with you on the second waiver.

On 10/29/2021 at 2:58 PM, Bill Presson said:

So if Johnny starts a business with no employees and wants a retirement plan, he has to wait to satisfy whatever the service requirement is going to be going forward?

I think the vast majority of the time you can find a way to get the owner in without immediate eligibility, which is effectively what "everyone employed on the effective date" becomes.  It's obviously more of a potential problem when the owner actually has employees, and the hire dates dovetail...at the extreme, you could have an owner "hired" on Jan 1 and employees hired on Jan 15 or whatever; yes I think it is problematic to include everyone employed on the effective date of Jan 1 and make everyone else wait.  I've seen on this board that people think that just because the plan allows for everyone employed on the effective date to be in, and everyone else has to satisfy a waiting period, that it's ok because it is a pre-approved document.  

Maybe overly conservative; I don't think I've heard of any cases where it was raised.  But I think I heard it discussed as a possible problem and for whatever reason that is stuck in my head.