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Deemed CODA concern - profit sharing contribution taken into account for partnership distribution


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I've been lurking for awhile, getting great information, but decided to finally hop-on and pose a question.  Apologies, if I missed any formalities or unwritten rules, let me know and I will make sure to address in the future! Thanks. 

I know the cross-tested profit sharing allocation being treated as a deemed CODA in a partnership setting has been addressed in a number of different posts, however, I had a question that I did not see addressed directly, and I wondered if anyone would like to opine on the below. 

Assume a plan has a profit-sharing feature that is allocated to individual allocation groups and tested on a cross-tested basis. The sponsor is a professional group treated as a partnership for federal tax purposes, with more than ten partners. The question stated as summarily as possible is whether a deemed CODA is created (or could be arguable be determined to be created by the IRS) if the partners year end partnership distribution (or bonus) is reduced by amounts they received as a profit sharing contribution. Stated differently, the plan sponsor/employer takes into account the profit sharing contribution in determining the partner/participants year end partnership distribution/bonus.  Assume that the plan sponsor fully complies with plan formalities in regards to declaring the profit sharing contribution amounts and directions to the Trustee as to the allocation of the contribution to each individual allocation group/account, and there is no paper trail showing individual elections/requests of the partners relating to the amount the would desire to have contributed to their account. 

I have looked for agency determinations and formal/informal guidance on the matter and have not been able to find anything other than the "we will know abuse when we see it" response. Was wondering if anyone had either (A) firsthand experience with a similar matter or (B) could point to any guidance informative on the matter. Thank you! 

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There is a bit of a cloud hanging on all such self-employed PS allocations that are not directly done by formula, but I don't think the IRS is trying to do anything about it.

As far as reducing distributions, I think it is a mathematical/accounting necessity.  Partners' retirement plan contributions are taken on their own returns, so their profits are one thing and cash distributions are another - if the partnership cuts the PS checks, they need to reduce the respective partners' distributions by their share of the PS allocations.

Ed Snyder

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Bird is spot on. The "employer" PS contributions made on behalf of partners is taken as a personal deduction on the individual's tax return and so necessarily reduces such partner's taxable income directly, dollar for dollar. PS contributions made on behalf of partners will reduce the cash available to distribute, but this in and of itself does not create a CODA. If all the partners got 10% PS or up to the 415 max, would you even be asking the question?

Regarding the determination of PS, there should be clear documentation at the partnership level and, as you note, no individual elections. 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services


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In order to be a CODA, each individual partner would have to have discretion over the amount contributed for him or her. If you don't have that, you should not have a CODA.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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