Retirement savings options for independent contractors


Normally, b and other retirement plan sponsors are not directly concerned with employment law, since such issues often have little effect on retirement plans and employee benefits in general. This article will outline the differences under current law between employees and independent contractors, as well as explain the impact on b and other types of retirement plans.

Though the regulations addressing the differences between employers and independent contractors have been extremely complicated at one point, the definitive guidance was a 20 factor—yes 20! Today, the IRS essentially utilizes three factors to determine if an individual is an employee or an independent contractor.

Basically, the stronger the control and more definitive the relationship, the more likely the individual is to be classified as an employee by the IRS. A participant retires from retirement savings options for independent contractors school district in June; however, in November he receives a contract to work on some specific projects for the district. The contract describes the projects that are to be completed, and the timing for completion; however, it does not provide specifics on retirement savings options for independent contractors the projects are to be undertaken.

The participant is not assigned an office, and must provide his own tools and equipment to undertake the specific projects. Has this individual severed employment? It is probable that he will be regarded as an independent contractor because he is under contract for activities that differ from the job he retirement savings options for independent contractors during employment. The independent contractor status is also strengthened because the school district is not providing a work site for him, and is not setting specific activities retirement savings options for independent contractors must perform to achieve completion of the projects.

Obviously, from an employment tax perspective, misclassification of employees as independent contractors is a serious issue, as payroll taxes would be owed. For many types of retirement plans, such as k plans, the inclusion of proper plan language that would exclude independent contractors, even if they are later determined to be employees of the company, has often served as a valid defense to such claims.

However, b plans are unique as to who can be excluded from the plan from an elective deferral standpoint. And b plans, though they can include independent contractors, have some unique issues of their own. The universal availability requirement means that, with limited exceptions, all employees retirement savings options for independent contractors not independent contractors must be provided with the opportunity to make elective deferrals to the plan.

Fortunately and logicallythe universal availability requirement does not apply to employer contributions. However, if employees are improperly excluded from the right to make elective deferrals to a b plan, the corrective procedure is generally for the employer to make an employer contribution, which can be a significant cost to the employer though recent EPCRS guidance has lessened this cost somewhat.

Thus, if employees who were independent contractors are subsequently reclassified as employees in a b plan, it is conceivable that such employees could be entitled to an employer contribution to the plan for the period that they were erroneously prohibited from makin elective deferrals. However, there should be no issue with excluding such employees from the right to receive employer contributions, provided that the fail-safe employee definition described above is included.

At first glance, the employee vs. However, there are some nuances in the b plan rules that do complicate coverage of independent contractors. The first issue involves governmental b plans. Though permits independent contractors to participate, the rules that define a governmental plan under ERISA stipulate the governmental plans may cover only employees.

Plans that cover only independent contractors are automatically exempt from ERISA, since these plans do not cover employees. The second issue relates to the lack of an employment relationship. In b plans, severance of employment is a primary triggering event for distribution purposes. But how can there be a severance of employment for non-employees? The IRS has addressed this issue in the b regulations by defining severance of employment for independent contractors as complete termination of the contractual relationship, via expiration of the contract or otherwise.

However if retirement savings options for independent contractors employer anticipates a renewal of the contract or intends to hire the individual as an employee, there is no severance of employment. Due to the employer tax implications, all employers should work with appropriate counsel to make certain that no employee is ever misclassified as an independent contractor. However, b plan sponsors should understand the additional exposure related to the universal availability requirement of such plans, and b plan sponsors should recognize the special rules in relation to such plans.

This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. The Definition Though the regulations addressing the differences between employers and independent contractors have been extremely complicated at one point, the definitive guidance was a 20 factor—yes 20!

Behavioral control considers the level of control the recipient of services has over how the individual does the job. Factors to be considered include the nature of any training and depth of the instructions given to the individual performing the task. Factors to be considered include whether the individual has made any investment in retirement savings options for independent contractors to perform the task and whether the individual or the recipient of services pays the expenses incurred.

Type of relationship considerations look to such factors as whether the relationship is bound by written contracts or specific periods of service. The Implications Obviously, from an employment tax perspective, misclassification of employees as independent contractors is a serious issue, as payroll taxes would be owed.

Therefore, governmental b plan sponsors who wish to cover independent contractors should maintain two b plans: Conclusion Due to the employer tax implications, all employers should work with appropriate counsel to make certain that no employee is ever misclassified as an independent contractor.

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