I have generally taken the position that a company cannot set up a retirement plan for its independent contractors, only its employees. (See the thread on 401k Plans for independent contractors.)

However, I understand there are some "employees" that by law can be considered as independent contractors for some purposes and as employees for others. Specfically, I have heard that this applies to life insurance agents. In other words, life insurance agents are technically independent contractors, but can be covered under the insurance company's retirement plan.

If this is true, to what other agents/brokers does this apply. Real estate agents/brokers? Travel agents that work for an agency? Others?

The law is changing fast! The recent 9th Microsoft case ruling resulted in "independent contractors" at Microsoft being eligible for retroactive employee benefits. Court responses to employee misclassification have resulted in a blurring of the traditional lines and rights when it comes to independent contractors and benefit plan participation. Is the person a "common law employee" is the better question to ask today.

Ron Wainrib
www.contingentlaw.com


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www.contingentlaw.com

I have a client who has 1099 employees and w-4 employees. The business is a commercial, janitorial company. Can the employer set up a simple IRA for all employees and if so where can I find this allowance in the IRS code or a court ruling that allows it?

Darin estes

I agree with Needtokno about the Microsoft case. Clearly, if the employer has misclassified individual as an independent contractor, the employer must include that individual in the discrimination testing. Whether or not that individual must be included in the retirement plan depends on the language in the retirement plan. Microsoft's language was inadequate. It is my understanding from attorneys that I've spoken to is that most plan language is similarly inadequate.

However, my original question was intended to deal with the situation whereby the individual is truly an independent contractor and not an employee. Is there a situation where that individual can be covered my the "employer's" pension plan. (Let's assume the "employer" wants to cover the independent contractor.)

Richard (or anyone else with an interest), did you ever get a definitive answer to your question? Can a qualified plan be set up to cover a group of employees who truly are independent contractors?

No. Only an employer can sponsor a plan for it's common
law employees. Each independent contractor could set up a separate plan and use net income reported on Schedule C as a basis for computing contributions.

alanm, thanks for the response. Could an employer set up a nonqualified plan for independent contractors?

With your example of insurance agent/broker, we have designed a number of non-qualified plans that allow this group to defer compensation. We also recently set up a non-qualified plan to cover a group of commercial real estate brokers etc. I don't know how you would deal with rank and file type for qualified plans.

The "employees" referred to are semi-employees for tax purposes. They are usually insurance agents or the like, as explained in an earlier message, and they receive W-2s with FICA withheld by the employer -- rather than the agents being responsible themselves for SECA taxes. As I recall, no income tax withholding takes place and the employee can itemize his personal business expenses that are not reimbursed by the agency or insurance company. In this respect, they look like independent contractors. By law, however, they are employees and CAN be covered by a qualified plan of the employer.

Consultants and others that receive a 1099 and no W2 cannot participate in any qualified ERISA plan whatsoever! ERISA qualiied plans must be for the exclusive benefit of the employees of the sponsoring employer. Participation by non-employees will -- and has in fact -- cause a plan to be disqualified.

Even if you could set up a NQP for independent contractors what would be the point? Each independent contractor would still pay tax on their contributions; the common law employer must pay tax on gains and contributions for the employee who gets the tax deferral while the money is in a Rabbi Trust.