401K Eligibility

[eytonxav]

Since retiring last year, I have worked as a 1099K consultant at a software development company. The HR rep tells me I can utilize their 401K program and since I'm over 50, can put in $16k. I was surprised at this as I thought only W2 employees are eligible under IRS rules. Does anyone know if 1099 contract employees can utilize a companies 401K plan?

Thx,

Doug

 

[Cal]

A lot will depend on how your company's 401k plan is written. I remember several years ago, several contract employees sued Microsoft claiming that they were de facto employees and entitled to benefits (401k, stock options, etc) as the regular employees were. Not sure how all that settled, but it could have an effect on how your company looks at contractors.

 

[mickeyd]

Most plans have a defination of a part-time employee and a full-time employee. Ask to see the one for your company. Contract employees are not usually included as either PT or FT so I'd question if you were eligible.

Does that employer contribute to the plan (i.e. 3%)? If so, would you be included in that 3%?

I don't recall ever seeing a non-employee as part of a plan, but if they let you in and you want to get in, I don't see how you could be penalized.

The copmpany may run into trouble with the IRS later on but if you were gone, what can they do? If they have an ERISA attorney it may be a good idea to get a legal opinion.

 

[John Galt]

I have never heard of a "non-employee" being covered by company employee benefit plans, unless someone
"fudged" the status to get them included. I have seen that many times and suppose if you are far enough under the radar it will never be a problem. Personally
I would find it troublesome.

John Galt

 

[eytonxav]

Thanks Guys, Well in this business it isn't unusual for a company to utililize 1099 staff, so I suppose they use the benefit as an inticement to work there. Unfortunately no matching contribution, but I can really use the tax break.

Doug

 

[John Galt]

Hi Doug and all. I forgot one thing. I own a small holding company and was looking for deductions.
I asked my CPA if there was a way to set up any kind of
retirement plan through the company. I take no salary and just issue myself a 1099 for any money I take out. He said there was
no way to do it unless I had paid "wages".

John Galt

 

[LawGirl]

As a self-employed person, you can set up your own 401k plan with minimal expense and hassle. You can put in the 401k limits (including catch-up limits for people who are at least age 50, which totals $16,000 this year) up to your earned income. You can then also make an "employer" contribution up to 25% of earned income. Many brokerage firms offer these. As a self-employed attorney, my individual 401k is with Fidelity. You don't have to file any plan reports until your plan holds over $100K, and most of the brokerages will handle this for you for a minimal fee. You can also do it yourself, it is easier than preparing your own taxes.

Settting up the 401k is great if it allows you to put aside more money than you can in a SEP-IRA. The SEP is even easier to set up, but you are limited to contributions equal to 25% of earned income. It just depends on how much you have available to save and how much trouble you want to go to. Fidelity has a SEP-IRA contribution calculator on its website that will show you how much you can save based on your income and expenses.

The approach I have described works best if you are a sole proprietor. There are some differences if you are an employee of your own corporation.

LawGirl

 

[mickeyd]

 Unfortunately no matching contribution, but I can really use the tax break.

Idea: When you receive a 1099, I do not believe that there is a box/section that indicates 401(k) contributions. There may be a real IRS problem for you after all in that you would not be receiveing a 1040 which indicates how much tax deferred income you are putting away.

I would really grill the financial person( benefits?) at the company on this and I would recommend that you get the advise of a CPA on this situation so that you will not get bitten in the ass in the future.

 

[farmerEd]

Thanks Guys, Well in this business it isn't unusual for a company to utililize 1099 staff, so I suppose they use the benefit as an inticement to work there.  Unfortunately no matching contribution, but I can really use the tax break.

Doug

Doesn't pass the smell test to me...if you are 1099, you are most defintely NOT considered an employee, not even a part-time employee, by definition...period. If they want to call you an employee, and start extending benefits, then they better be paying Medicare and FICA taxes on your behalf, and also withholding your portion of FICA and Medicare tax as well....not to mention workers comp, state and federal unemployment taxes etc...and you won't be getting a 1099, youd be getting a W2.

I think you better ask the HR person to get his facts straight, I don't think they are.

 

[John Galt]

I agree with farmer Ed about the "smell test". I don't have all of the answers (gasps of surprise) but I worked
in finance for years and dealt with this issue a lot.

John Galt

 

[Cal]

http://cobrands.business.findlaw.co...ency/AD16A187-E2C3-4670-8B4CE14C99CC4147.html
Here is some information about the lawsuit between Microsoft and its indepdendent contractors. Regardless of whether you participate in the 401k, you should be sure you can pass the IRS requirements as an independent contractor. I know many companies will pay former employees as "contractors" for consulting work. However, most of the time, if the situation is examined by the IRS, it will not pass the independent contractor status.

Also, you should be concerned whether the company is administering the 401k plan correctly. If a plan is disqualified, it has repercussions on its participants - potentially the reclassification of wages from tax-deferred to taxable (for prior years).

IRS qualifications for independent contractor:
http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html
IRS info about disqualified 401k plans:
http://www.irs.gov/pub/irs-tege/401k-survey.pdf

 

[eytonxav]

Cal, Interesting links! Although I have a contract that states explicitly that the relationship between me and the company is that of an independent contractor, with myself being responsible for paying all taxes, other aspects of the test would lead me to believe they should be treating me as a W2. Nevertheless, I am going to talk to my accountant to get some further clarification/advice.

Thanks,

Doug