Exclusion of Statutory Employees

An insurance agency says that its employees are statutory employees, but pays them W-2 income instead of 1099 income.  Their W-2s consist entirely of commissions and they all work from home.  They work as they wish - essentially as independent contractors - but are paid a W-2 income.  Is the agency able to exclude them from their 401(k) plan?  It seems that most statutory employees who get paid 1099 income may not be considered eligible employees, but I couldn't find information that discusses how eligibility is handled when their income is reported on a W-2.  Has anyone come across a situation like this?  

https://www.irs.gov/businesses/small-businesses-self-employed/statutory-employees

That an employer or service recipient classifies insurance producers as statutory employees for reporting compensation on Form W-2 does not necessarily mean such a worker is eligible to participate under a particular retirement plan, or even that one is an employee as the plan defines it, or as ERISA § 3(6) defines it.

If your question is about whether these workers are or could be participants, Read The Fabulous Document.

If your question is about how excluding these workers might affect coverage, non-discrimination, and other conditions of tax-qualified treatment under Internal Revenue Code of 1986 § 401(a), one would look to those rules.

Thank you for your responses but I'm afraid I still need some clarification.  No doubt the employees fall into at least one of the four categories described in the link provided, but the page only refers to their treatment for certain employment tax purposes.  What I'm trying to determine is whether the employees I've described are required to be covered by a qualified plan that is sponsored by the entity that issues W-2s to them and not whether they can be excluded by design - I should've been more specific.  There's no document as the agency is thinking about starting a new plan, so my question is geared towards how federal laws apply.  

https://retirementlc.com/retirement-plans-for-statutory-employees/

Internal Revenue Code of 1986 (26 U.S.C.) § 7701(a)(20) provides:  “For the purpose of applying the provisions of section 79 with respect to group-term life insurance purchased for employees, for the purpose of applying the provisions of sections 104, 105, and 106 with respect to accident and health insurance or accident and health plans, and for the purpose of applying the provisions of subtitle A [income taxes] with respect to contributions to or under a stock bonus, pension, profit-sharing, or annuity plan, and with respect to distributions under such a plan, or by a trust forming part of such a plan, and for purposes of applying section 125 with respect to cafeteria plans, the term ‘employee’ shall include a full-time life insurance salesman who is considered an employee for the purpose of chapter 21 [FICA].”  For FICA taxes, “a full-time life insurance salesman” is treated as if she were an employee.  IRC § 3121(d)(3)(B).

Following this, a service recipient is not precluded from including its nonemployee full-time life insurance salespersons from the service recipient’s IRC § 401(a) retirement plan.

The Internal Revenue Manual recognizes this.  IRM 4.23.5.7.4.1 (11-22-2017) https://www.irs.gov/irm/part4/irm_04-023-005r#idm139946602957840.

For plan design, you might test whether excluding such a deemed employee from a plan’s nonelective contribution, matching contribution, or elective-deferral contribution would cause the plan to fail to meet one or more coverage or nondiscrimination conditions.

In my experience, excluding them might not tax-disqualify a plan because life insurance salespersons tend to be highly-compensated employees.

Excellent information.  The agency sells home and auto insurance, but it's interesting to know that life agents are treated differently.  Thank you all and enjoy the holidays!

I happen to have some more experience dealing with full-time life insurance salespersons who are classified as statutory employees. In weighing the factors for classifying workers as employees versus independent contractors, full-time life insurance salespersons who are statutory employees must satisfy many of the factors leaning toward independent contractor status, except that the service contract contemplates that substantially all of such services are to be performed personally by the contract for such insurance company and such individual does not have  a substantial investment in facilities used in the performance of such services. As expected, Peter has accurately quoted the relevant sections of the Code subjecting such individuals to FICA and permitting such workers to be covered as an employee under certain employee benefit plans. Basically, such an individual is a hybrid between a common law employee and an independent contractor with respect to the entity hiring him or her. I am also in agreement with Peter's conclusoin that such individuals do not need to be covered under a plan