Is she really the employer?

I am meeting with an employer about starting a 401k plan.  Details are sketchy but for now, I was told that its a husband and wife who own the business.  However, the wife (who I am told is very much involved with the business) receives 1099 pay from the company.  No W-2,  no other compensation from the plan.  

(1) I've never seen this arrangement before; is this acceptable?

(2) So the spouse has no company wages and would not benefit in a new company 401k plan.  But could the wife have her own plan, based on 1099 pay?  If so, controlled group issues come into plan. But she needs to have a business to have a 401k plan.  Which she does.  But is paid via 1099 from it.

Any thoughts are appreciated.  I will find out more shortly but this seems kind of odd.

Thanks 

1 minute ago, Santo Gold said:

I am meeting with an employer about starting a 401k plan.  Details are sketchy but for now, I was told that its a husband and wife who own the business.  However, the wife (who I am told is very much involved with the business) receives 1099 pay from the company.  No W-2,  no other compensation from the plan.  

(1) I've never seen this arrangement before; is this acceptable?

(2) So the spouse has no company wages and would not benefit in a new company 401k plan.  But could the wife have her own plan, based on 1099 pay?  If so, controlled group issues come into plan. But she needs to have a business to have a 401k plan.  Which she does.  But is paid via 1099 from it.

Any thoughts are appreciated.  I will find out more shortly but this seems kind of odd.

Thanks 

  

(1) Is it acceptable to treat her as a contractor vs employee is a facts and circumstances question.  What I can tell you is the law determines if you are an employee or a contractor.  Too many people think this is something you can agree to or decide by contract.  That isn't true.   There are tests to determine if you are an employee or not.  You should recommend they get an attorney to review the situation.  There can be a large number of bad consequences if this is gotten wrong. 

(2) Assuming she is a contractor she can have her own plan as that is her business.  I don't do many husband/wife business controlled group plans any more but yes there are a number of traps waiting there. 

17 hours ago, Santo Gold said:

I am meeting with an employer about starting a 401k plan.  Details are sketchy but for now, I was told that its a husband and wife who own the business.  However, the wife (who I am told is very much involved with the business) receives 1099 pay from the company.  No W-2,  no other compensation from the plan.  

(1) I've never seen this arrangement before; is this acceptable?

(2) So the spouse has no company wages and would not benefit in a new company 401k plan.  But could the wife have her own plan, based on 1099 pay?  If so, controlled group issues come into plan. But she needs to have a business to have a 401k plan.  Which she does.  But is paid via 1099 from it.

Any thoughts are appreciated.  I will find out more shortly but this seems kind of odd.

Thanks 

  

This whole description smacks of the possibility of a significantly bad situation. You don't have much to go on; let's assume worst case that it's a partnership. Can a partner be paid W-2 from his/her partnership rather than via a K-1?  No.  Can they be paid as an independent contractor?  NOPE.  This existing 1099 treatment needs to be looked at by competent eyes (atty, acct, consultant) who KNOWS the rules and can figure out what's going on and whether it's within the rules.

IF (note, GIANT IF!) the 1099 was appropriate, then she could have a plan using her self-employed income, but as you note, you have to deal with the entire controlled group issue and if there are employees in the business, you probably have to deal with the two entities as one anyway.  Sure doesn't sound like the "uninvolved spouse" rule would apply here.