3508 Direct Sellers

Good afternoon to all,

I have been asked to get your input on the following question:

"Can a " 3508 direct seller" person participate in a 401(k) Plan? They are paid by way of a 1099 rather than W-2 and are recognized as "Employees" for some benefit purposes. We do not have experience with this type of "employee". If the plan defines compensation as W-2 income then they have no compensation to defer from. Maybe they make Roth deferrals or Voluntary Employee Contributions? Any thoughts or comments are appreciated."

The questions is being raised on behalf of a plan sponsor who DOES wish to cover such persons if a way can be found to do so.  

Thank you as always.

Unless "this title" doesn't apply (and I am genuinely unsure that it does but am 99% sure that these people are not employees for retirement plan purposes) the answer is pretty clear (my emphasis).  

(a)General ruleFor purposes of this title, in the case of services performed as a qualified real estate agent or as a direct seller—

22 hours ago, ldr said:

Good afternoon to all,

I have been asked to get your input on the following question:

"Can a " 3508 direct seller" person participate in a 401(k) Plan? They are paid by way of a 1099 rather than W-2 and are recognized as "Employees" for some benefit purposes. We do not have experience with this type of "employee". If the plan defines compensation as W-2 income then they have no compensation to defer from. Maybe they make Roth deferrals or Voluntary Employee Contributions? Any thoughts or comments are appreciated."

The questions is being raised on behalf of a plan sponsor who DOES wish to cover such persons if a way can be found to do so.  

Thank you as always.

 

 

 

 

A 3508 direct seller (it would have been nice if the OP explained this) is a real estate sales agent.  This is a plain vanilla situation; nothing special or complicated. 

They are independent contractors and can set up their own retirement plans.  I have a bunch of them. The plan you set up has to have language dealing with a self-employed person compensation calculation, and deferrals are certainly normal for a sole prop.

Assuming the agent files as a sole prop (he could also have his own corp, in which case he would have to pay himself a W-2 and everything would be normal), he has a Schedule C and all the normal rules apply.  Nothing special here.

8 hours ago, Larry Starr said:

Nothing special here.

Wave's hand in air and says: Move along.

I'm going to go out on a limb here though and suggest that the OP wants the real estate agent to participate in a 401(k) plan other than setting up their own (as Larry points out).

I think that may be the issue.

14 minutes ago, Bill Presson said:

I'm going to go out on a limb here though and suggest that the OP wants the real estate agent to participate in a 401(k) plan other than setting up their own (as Larry points out).

I think that may be the issue.

Pretty much how I read it, although from the way it was presented I thought it was some other kind of direct seller.  We looked into the possibility of this once for a real estate agency and decided it was "not worth it" (polite terminology for "insane").

6 hours ago, Bill Presson said:

I'm going to go out on a limb here though and suggest that the OP wants the real estate agent to participate in a 401(k) plan other than setting up their own (as Larry points out).

I think that may be the issue.

Wouldn't surprise me if that's another thing not explained in the original posting.  PLEASE PEOPLE: tell us all the details when you have a question!!!!

If that is what he was thinking of, it would be an "issue" but the answer is the same. He is NOT an employee of someone else; can someone who is NOT an employee participate in another employer's plan?  We all know the answer to that now don't we?

Hi to All Y'all,

Be patient and don't shoot the messenger.  This is not a case of real estate agents.  I put up what I was told to put up as a question.

Now as to the details you asked for:  This is a construction company that does remodeling/upgrades of residences.  They have a crew of salesmen who were regular W-2 employees until just a couple of months ago when they got reclassified as "direct sellers". The employer has told them that they can continue to participate, but we don't see how.  If they do not have W-2 wages anymore, what is there to do any withholding from?  When we told the employer our opinion, he asked us to find out if there was some way to continue to cover them.

Since nobody ever asked us this question before, I would have had no way of knowing how much detail you need.  Keep asking questions though.  I will be happy to tell you whatever I know and to find out if I don't know.

Thank you for your ideas.

P. S. to the question:

The reason this came up in the first place is because one of these "direct sellers" went online at the recordkeeper and applied for a distribution due to being 'terminated". In turn, I asked the employer's HR manager for a date of termination so I could approve the request.  I kept pressing for a date and he finally told me that this employee and others so classified are "not exactly employees" and "not exactly terminated' either.   Here's precisely what he said:

We converted our salesforce to 3508 direct sellers on 2/1. 

The 3508 Direct Seller is an odd breed, and I have found that even the most seasoned accounting experts are baffled by it.

We are not taking out federal taxes.  He will receive a 1099 for the work done after 2/1, and a W2 for work before.  The actual definition, according to our legal department, is “statutory non-employee”.  In our state, we still take out state taxes.

Many people (including myself initially) are quick to say that he is now an independent contractor.  However, the 3508 is not an independent contractor.  He is covered by our workers comp, gets benefits, and we have complete control over his work. 

So, I’m not exactly sure how this should be handled.  If he wants to take out his money, that’s fine with me.  There is no question that our sales (and thus, his income) is taking a tremendous hit due to the pandemic, and that he will likely file for unemployment even if not separated.

Their 401(k) Plan document defines compensation as Box 1 of the W-2 form with the add-back of deferrals, 125 plan contributions etc.  Our position was based on the fact that after 02/01/2020, there will not be any Box 1 W-2 income.

The real issue here is whether the employer is incorrectly (or correctly) determining whether or not thery are "employees." That's an entirely separate issue,and there has been lots of litigation on this issue But the answer to THIS employer, based on their determination and instruction and information given to you, is what the previous posters have already told you - no, they can't participate in the plan.

But hey, that's just my humble opinion.

Under the circumstances, any chance these W-9 recipients and their "employer" could be considered an affiliated service group?

23 hours ago, ldr said:

Hi to All Y'all,

Be patient and don't shoot the messenger.  This is not a case of real estate agents.  I put up what I was told to put up as a question.

Now as to the details you asked for:  This is a construction company that does remodeling/upgrades of residences.  They have a crew of salesmen who were regular W-2 employees until just a couple of months ago when they got reclassified as "direct sellers". The employer has told them that they can continue to participate, but we don't see how.  If they do not have W-2 wages anymore, what is there to do any withholding from?  When we told the employer our opinion, he asked us to find out if there was some way to continue to cover them.

Since nobody ever asked us this question before, I would have had no way of knowing how much detail you need.  Keep asking questions though.  I will be happy to tell you whatever I know and to find out if I don't know.

Thank you for your ideas.

 

ldr, as the messenger it is up to you to ask those who ask you to post something for a more complete explanation that you can provide so that people don't waste time (or worse, just skip our question) trying to get you a reasonable response. 

But I think you have your answer.  Assuming they are properly classified, they are no longer employees for retirement plan purposes.

Thank you, everyone, for your input.

@FPGuy, I like the way you think!  We will pursue that idea and see what comes of it. Right offhand, I don't quite see how, because they all get reported to us as being employees of one big company.  Maybe the sales organization could be separated out and turned into a separate company. All to be seen.