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 that 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 definition of Earned Income 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-R instead of a W-2 or has an independent contractor agreement is not determinative. The IRS applies twenty factors (yes!) to determine who is an employee for purposes of your plan that examines the degree of control that the plan sponsor has over the individual’s performance of their job responsibilities and whether the worker provides similar services to other employers.
Leased employees (aka “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 plan sponsor 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 plan sponsor 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
Plan sponsors may exclude employees from participation 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. Please see here for more information about employees as part of the initial and year-end census file collection.