New DOL Rule for Independent Contractors

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The Department of Labor’s (DOL) final rule on employee classification, finalized in January, could significantly affect which workers are eligible to join retirement plans such as 401(k) and 403(b) plans.

New Criteria for Worker Classification

The DOL’s rule requires employers to evaluate six criteria with equal importance when determining if a worker is an independent contractor or an employee:

1. Opportunity for Profit or Loss: Assessing whether the worker can realize a profit or incur a loss.
2. Relative Investment: Comparing the investments made by the worker and the employer.
3. Permanence of Relationship: Evaluating the duration and continuity of the relationship.
4. Control Over Work: Considering the worker’s control over pricing, hours, and other aspects of their work.
5. Integral Nature of Work: Determining how essential the worker’s tasks are to the employer’s business.
6. Skill and Initiative: Looking at the level of skill and initiative required for the worker’s role.

This new framework may lead to more workers being classified as employees rather than independent contractors.

Implications for Retirement Plan Eligibility

According to David Levine, a principal at Groom Law Group, this reclassification affects retirement plan eligibility:

• 401(k) and 403(b) Plans: Generally, independent contractors are not eligible to join these plans.
• 457 Plans: Independent contractors can join.
• 403(b) Church Plans: Self-employed ministers are an exception and may join these plans.

Actions for Plan Sponsors

Plan sponsors should take the following steps to ensure compliance with the new rules and assess the potential impact on their retirement plans:

1. Review Plan Documents: Check the current language regarding eligibility criteria and how independent contractors are defined.
2. Evaluate Independent Contractor Processes: Analyze the processes used to classify workers and ensure they align with the new DOL criteria.
3. Consult Plan Counsel: Work with legal advisors to understand which workers might now be eligible for the plan under the new rules and make necessary adjustments.

Levine highlights that many plans include language excluding individuals not initially classified as employees from eligibility, even if reclassified later. This could lead to complexities in ensuring proper plan inclusion and compliance.

The DOL’s new rule on worker classification requires careful consideration and review by plan sponsors to avoid potential compliance issues and ensure that eligible workers are correctly included in retirement plans. Plan sponsors should take proactive steps to review their plan documents, processes, and consult with legal advisors to navigate these changes effectively.

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