What are the laws concerning household employees and business employees in the same 401(k) plan?

A household cannot be a member of a controlled group subject to 414(b) or 414(c), since it is not a trade or business.

Prior to EGTRRA, while employers could make nondeductible contributions to tax-qualified plans for household employees (nondeductible because they were not made in connection with a trade or business of the employer), they were subject to the excise tax on nondeductible contributions. There was not, therefore, an incentive to provide plans for these employees.

Now, EGTRRA precludes imposition of the 10% excise tax on nondeductible contributions to a SIMPLE 401(k) or a SIMPLE IRA, which are not deductible solely because such contributions are not made in connection with a trade or business of the employer. With this change, effective after 12/31/01, individuals who employ such workers may now be more likely to provide them with tax-qualified retirement plan coverage. Note that the contributions are still not deductible, but the excise tax no longer applies.

The language of the Act may be helpful:

SEC. 637. WAIVER OF TAX ON NONDEDUCTIBLE CONTRIBUTIONS FOR DOMESTIC OR SIMILAR WORKERS

(a) IN GENERAL.-Section 4972(c)(6) (relating to exceptions to nondeductible contributions), as amended by section 616, is amended by striking ''and'' at the end of subparagraph (A), by striking the period and inserting ''or'' at the end of subparagraph (B), and by inserting after subparagraph (B) the following new subparagraph: ''(C) so much of the contributions to a simple retirement account (within the meaning of section 408(p)) or a simple plan (within the meaning of section 401(k)(11)) which are not deductible when contributed solely because such contributions are not made in connection with a trade or business of the employer.''

(b) EXCLUSION OF CERTAIN CONTRIBUTIONS.-Section 4972(c)(6), as amended by subsection (a), is amended by adding at the end the following new sentence:

''Subparagraph (C) shall not apply to contributions made on behalf of the employer or a member of the employer's family (as defined in section 447(e)(1)).''

(c) NO INFERENCE.-Nothing in the amendments made by this section shall be construed to infer the proper treatment of nondeductible contributions under the laws in effect before such amendments.

(d) EFFECTIVE DATE.-The amendments made by this section shall apply to taxable years beginning after December 31, 2001.