50% Owner lists 0 hours but compensation on census

I have a corporation with two 50% owners.  On the census, one owner is listed with $27,000 in compensation and 0 hours worked.  When questioned, thinking there was an error in the hours listed, I was told that this is a year-end bonus for the owner, reported on a W-2 issued by the employer, and 0 hours worked is correct.  The owner is not terminated and this is not any sort of severance pay.    In prior years this owner has worked 1,000 hours and has satisfied the plan's eligibility requirements.  The 50% owner with 0 hours deferred $6,000 into the plan from his bonus.  I do not know if he can defer on wages with 0 hours worked.

The adoption agreement counts "Hours of Service" on the basis of actual hours for which an Employee is paid or entitled to payment.  Compensation definition is 3401(a) - W-2 Compensation subject to income tax withholding at the source, with all pre-tax contributions included.  There are no exclusions from compensation.

I could not find anything similar to this situation in the ERISA Outline book, ERISAPedia, or research on this forum.  Thank you.

27 minutes ago, jsample said:

I have a corporation with two 50% owners.  On the census, one owner is listed with $27,000 in compensation and 0 hours worked.  When questioned, thinking there was an error in the hours listed, I was told that this is a year-end bonus for the owner, reported on a W-2 issued by the employer, and 0 hours worked is correct.  The owner is not terminated and this is not any sort of severance pay.    In prior years this owner has worked 1,000 hours and has satisfied the plan's eligibility requirements.  The 50% owner with 0 hours deferred $6,000 into the plan from his bonus.  I do not know if he can defer on wages with 0 hours worked.

The adoption agreement counts "Hours of Service" on the basis of actual hours for which an Employee is paid or entitled to payment.  Compensation definition is 3401(a) - W-2 Compensation subject to income tax withholding at the source, with all pre-tax contributions included.  There are no exclusions from compensation.

I could not find anything similar to this situation in the ERISA Outline book, ERISAPedia, or research on this forum.  Thank you.

They can't pay someone W-2 wages UNLESS he is an employee providing services.  Otherwise, it is a dividend to a stockholder and it is NOT deductible to the corp.  I would suggest they are giving the WRONG ANSWER.  They should be saying something like "he consults to the company all year long for which he is paid the $27k", and they say that is over 1000 hours a year. They need to stop saying they are violating the law by paying W-2 style income to a non-employee!!!!

22 minutes ago, Larry Starr said:

They need to stop saying they are violating the law by paying W-2 style income to a non-employee!!!!

Not that Larry is giving legal advice.  ?

1 hour ago, david rigby said:

Not that Larry is giving legal advice.  ?

It's a careful balancing act.  As an Enrolled Agent, I get to practice Federal "tax law" as any accountant does.  In addition, I get to practice ERISA "law" because that is what I am licensed for by my Federal license.  That is also why my QDRO work is ALWAYS done through a lawyer since that is practicing domestic law which I cannot do directly but can be hired by an atty to produce work product for them.  And I have been known to "cross over" the line sometimes!  ?

Thank you !