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Retirement Plans for Statutory Employees

“One of my business-owner clients employs ‘statutory employees.’ Does the owner have to cover these workers under a retirement plan established for the business?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from New York is representative of a common inquiry related types of employees and retirement plans.

Highlights of the Discussion

  • If the workers have been properly classified as statutory employees [IRC §3121(d)(3)], then your client would not have to cover them under a retirement plan established for the business—as long as the business is not selling life insurance.
  • Generally, statutory employees are independent contractors who meet certain conditions related to Social Security and Medicare taxes, and are
  1. Agent-drivers or commission-drivers,
  2. Full-time life insurance salespersons,
  3. Home workers, and
  4. Traveling or city salespersons.
  • Statutory employees remain independent contractors for employee benefit purposes in the eyes of the IRS. As such, they are not eligible to participate in an employee benefit plan sponsored by the business owner for employees. However, as statutory employees, because the IRS views them as independent contractors, they could establish and maintain their own retirement plans based on their self-employment earnings.
  • The one exception to the above rule is for full-time life insurance salespersons. They are treated as employees not only for Federal Insurance Contribution Act (FICA) tax withholding purposes, but also for certain employee benefit programs maintained by the business [IRC 7701(a)(20)]. As a result, they may participate in the business owner’s qualified deferred compensation or retirement plans under IRC §401(a).  They are also entitled to other employee benefits such as group term life insurance, accident and health plans and cafeteria plans. Note that a full-time life insurance salesperson may not base contributions to a self-employed retirement plan on the compensation received from the insurance business (Part 4, Chapter 23, Section 5 of the Internal Revenue Manual Technical Guidelines for Employment Tax Issues).

Conclusion

An individual who performs services for a business may be classified as 1) an independent contractor, 2) a common law-employee, 3) a statutory employee or 4) a statutory nonemployee. Proper employee classification is critical for tax and employee benefit purposes. Therefore, it is prudent for business owners to seek competent tax guidance when making these determinations. The IRS explains each classification in more detail in Publication 15-A, Employer’s Supplemental Tax Guide.

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