Independent Contractor turned Employee

We have an owner only plan that recently went through a Department of Labor and Employment Unemployment Insurance Employer Services Audit in 2025. The audit was for 2023. It was determined that the 1 Independent Contractor was actually an employee. The client paid the necessary taxes and began treating them as an employee for the remainder of 2025. So for 2025, the Independent Contractor turned employee received both a 1099 and a W-2. Is it reasonable for the client to list the employee's hire date as the audit close date since this is when the employee began receiving W-2 wages? 

No. I think you are using a corrected reporting requirement (i.e., on the Form W-2 vs 1099) mid-2025 as the key to when the service provider's classification changed from independent contractor to employee. But, it seems based on what you have stated, the DOL took the position that the service provider has in fact been an "employee" since 2023. The 2023 date is the date the service provider should be treated as an employee for purposes of the retirement plan.  I would imagine an exception if the DOL explicitly states that the employer may treat the service provider as an employee on a going forward basis (for the remainder of 2025). I doubt the DOL would offer that concession.

Before considering other steps, the plan’s administrator (even if that is the same person as the plan’s sponsor) might, with its lawyer’s advice, consider whether the worker was or is eligible for the retirement plan.

That a worker is, or is treated as, an employee under one or more public laws, even a Federal law, does not—at least not by itself—mean the worker is an eligible employee, or even an employee, within the meaning of a retirement plan’s definitions and provisions.

Consider also that if ERISA’s title I governs the plan, ERISA supersedes and preempts the legal effect of a State agency’s finding that a worker is or is not an employee. Or, if a plan is not ERISA-governed, the plan might be governed by the internal laws of a State other than the State that made a finding about who is or is not an employee. Or, the plan’s provisions might make a State agency’s finding—even if the same State’s law governs the plan—unimportant or even irrelevant.

Many retirement plans’ governing documents include a definition or provision that a worker is not an employee for the retirement plan unless the service recipient classifies the worker as an employee. That can be so even if the service recipient’s classification of a worker as not an employee is contrary to all public laws.

(Some lawyers started writing plans this way beginning in 1974; others began soon after reading Vizcaino v. Microsoft Corp., 120 F.3d 1006, 21 Empl. Benefits Cas. (BL) 1273 (9th Cir. July 24, 1997) (After finding that a class of workers Microsoft had treated as nonemployees had been employees, the appeals court remanded to the trial court the question of what benefit ought to have been provided under a non-ERISA plan, and remanded to the plan’s administrator questions about what benefit, if any, ought to have been provided under an ERISA-governed plan.).

RTFD—Read The Fabulous Document.

If the administrator finds the worker is ineligible, the plan’s sponsor might consider whether applying the plan as written might result in a failure of a tax-qualification condition, including those about coverage and nondiscrimination. If so, and if the plan’s sponsor prefers a tax-qualified plan, the plan’s sponsor might consider a retroactive amendment to increase coverage.

Further, if a change results in a plan its administrator had reported as not governed by ERISA’s title I having existed as ERISA-governed for a period before 2026, the administrator might consider what Form 5500 reports to amend or make.

If it becomes needed or helpful to record the worker’s employment commencement date, might that be the first day the worker first performed an hour of service as an employee (even if that date is before the worker became, or could have become, eligible)? Might that date be even earlier than 2023?

This is not advice to anyone.

Many retirement plans’ governing documents include a definition or provision that a worker is not an employee for the retirement plan unless the service recipient classifies the worker as an employee. That can be so even if the service recipient’s classification of a worker as not an employee is contrary to all public laws.

If you have an owner only plan and the DOL has stated for unemployment insurance purposes your independent contractor is really an "employee" beginning in 2023, you are suggesting that one possible option is to look at the terms of the plan document to determine if there is either a Microsoft carveout or if there is a plan document definition of "employee" or employee classification would somehow preclude including this employee in the plan? No matter what the plan document says, if this employer has agreed to the DOL's position that the service provider is an employee (as evidenced by the fact that they agreed to pay back-taxes for employment and report him on a W-2 on a going forward basis) that is pretty strong evidence that the service provider has been since at least 2023, a common law employee under state law. The plan will fail 410(b) coverage by excluding him from the plan.  

As mentioned above: “If the administrator finds the worker is ineligible, the plan’s sponsor might consider whether applying the plan as written might result in a failure of a tax-qualification condition, including those about coverage and nondiscrimination. If so, and if the plan’s sponsor prefers a tax-qualified plan, the plan’s sponsor might consider a retroactive amendment to increase coverage.”