As with almost every aspect of sponsoring a retirement plan, simple questions aren’t always so simple to answer. Identifying all of your employees is critical for your plan since it is the basis upon which we perform annual compliance testing, determining eligibility, and many other critical plan functions.
A good rule of thumb is that anyone who received a W-2 from the company is generally going to be considered an employee for plan purposes. Below is a list of those who could be classified as employees:
Owners
Owners who receive active compensation via personal services to the company, which is considered a material income-producing factor, must be reported in the census as they impact testing. Owner employees with income not reported in a Form W-2 may use the Earned Income definition located in the Basic Plan Document. This definition requires personal services to the company, which is considered a material income-producing factor.
Independent Contractors
The fact that an individual’s compensation is reported on a 1099 instead of a W-2 or has an independent contractor agreement is not determinative. The IRS applies twenty factors to determine who is an employee for purposes of your plan that examines the degree of control that the employer has over the individual’s performance of their job responsibilities and whether the worker provides similar services to other employers.
Leased Employees (or “Common Law Employees”)
Though many think a leased worker is a temporary employee of a staffing company, they can be considered an “employee” for purposes of the plan if the employer pays a fee for the individual’s services, the individual performed services for at least one year on a substantially full-time basis, and the employer had primary direction over the worker’s services.
Students or Interns
Some companies hire college students or seasonal interns to provide temporary assistance. If your company wants to treat that group of individuals differently for purposes of the plan, the definition should be clear as to whether “students” or “interns” applies to all students, just those enrolled in full-time undergraduate programs, or whatever variations make sense for your business. Whatever categories are used, it is important to describe them with some precision and apply them consistently. We rely on the information you provide to us.
Union Members
Employers may exclude employees from participating in their 401(k) or 403(b) plan, regardless of whether they are covered by a separate retirement plan, as long as their benefits are the subject of good-faith bargaining.
Non-Resident Aliens
It is becoming more common for employers to hire employees from other countries. However, once your international employees arrive in the United States and start working for you, questions arise about whether they could or should participate in your retirement plan. Resident Aliens are treated like United States citizens for plan and taxation purposes. In contrast, Non-Resident Aliens are treated differently, and they can be excluded from the plan as long as they do not earn any income from any source in the United States. If your organization has a parent or affiliate in the United States and abroad, make sure you inform us of that during your plan onboarding.
As with all data, records, and other information provided to us, you are responsible for ensuring it is accurate and complete. We rely on the information you give us when we perform our services. Your responsibilities include making sure any individual doing any work at or for your company are properly classified as “employees” and providing the information we need about all employees at plan implementation and on an ongoing basis each year.
Classifying Employees in Your Vestwell Employer Portal
You can classify your employees as one of the following directly in your employer portal:
- Collectively Bargained (Union)
- Non-Resident Alien
- Independent Contractor (1099)
- Leased Employee
- Other Exclusion
Note: If an employee is marked with any of the classifications listed above, they will become ineligible for the plan. Please be sure to use this classification tool accurately to maintain correct information about your employees. As an employer sponsoring a retirement plan, it is your responsibility to provide Vestwell with accurate information about your employees.
To update an employee's class, please follow these instructions:
- Navigate to the “Employees” page in your Vestwell employer portal. From the list of employees, locate the employee you would like to classify. Then, click on their blue, hyperlinked name.
- This will take you to their individual employee page. Within the “Employment” card, click Edit.
- A popup will surface, where you can input a classification in the “Employee Class” dropdown. Once you have made a selection, click Save.
- Once you have clicked Save, you will be brought to the employee’s page again. If you made any changes, you will see a success message at the bottom of the page and updates will be reflected here. Relevant changes will also be reflected on the “Employees” page of your Vestwell portal.
If you have any questions, don't hesitate to get in touch with us at clientsuccess@vestwell.com.