"Reclassified Employees" - it's oddball week!

I haven't ever encountered an actual question on this. Most of the pre-approved documents I've seen contain a provision that "Reclassified employees" are excluded for employer contributions (but not for deferrals unless it is a Church) UNLESS the employer elects, either in the AA or in an Appendix, to INCLUDE one or more categories of "Reclassified employees." My assumption is that such employees are excluded, but not EXCLUDABLE for coverage testing, etc. 

Agree/disagree?

I have some vague memory that these provisions were instituted due to Microsoft or similar situations, where employees who were treated as independent contractors subsequently were determined to be common law employees.

You're right. They are included for coverage testing for both 403(b) and 401(a) plans. Mostly, we don't worry about the effect of this on nonprofits too much though, because the number of people treated as independent contractors is small enough that counting them for coverage purposes (even if all of them were recharacterized) would not throw off coverage testing. There aren't a lot of nonprofits that have Microsoft's situation. 

The bigger issue is the universal availability rule. That's a damned if you do and damned if you don't situation. If you include someone who really is an independent contractor, you have violated the rule that a 403(b) plan can cover only employees. If you fail to include someone later recharacterized as an employee, you have violated the universal availability rule. So there is no "safe" option other than avoiding having independent contractors at all. 

Thanks Carol. I just love my job!!!