Luke Bailey

The IRS's position is that an individual cannot be both a W-2 employee and a K-1 partner of the same partnership at the same time, so unless this was sequential (e.g., the individual became a partner mid-year), no answer is going to make sense. Was this sequential?

The partnership contributes the cash out of partnership assets, and then allocates the cash cost for partners (and staff) in accordance with the partnership agreement. I am pretty sure that for virtually all partnerships, the partnership agreement will say that the total staff contributions are allocated based on each partner's percentage share of profit (like rent, salaries, etc.), but on the other hand most partnerships will say that the contribution for an individual partner (deferral, match, nonelective) are individually allocated to that partner, reducing the cash that otherwise would be distributed to him or her by exactly the amount contributed for him or her. So, e.g., if A and B are both 2% partners, and A defers and gets a match, but B does not so gets no match, B does not pay any of A's match. Same for a nonelective, where one partner's nonelective is higher than another's, or DB where contributions for different partners differ based on age or other criteria. The income tax deduction follows the cash, however allocated. I am aware of some partnership agreements that do not individually allocate partners' nonelective, match, or pension contributions back to them as an individual item. Bottom line answer to your question, nancy, is that it is very likely that each of the partners receiving the top-heavy contribution will fund their own allocation as a reduction of the profits individually distributed to them in cash, but this will depend on the partnership agreement and the individuals' status as equity vs. nonequity partners.

OK. Good to know, EBECatty. Interesting that the IRS apparently answered the question in the right way for 83, even though the statute was at best unclear. So I guess my conclusion would be that on a substance over form basis, one would hope it would work, but you're rolling the dice when your justification is substance over form and the reg (here the 409A regs, not the 83 regs) seems to have form going the other way. If there is a significant amount involved, I would go for a ruling. Note, however, that the provision of the 83 regs that you quote above might be ammunition in any conversation with the IRS regarding whether exercise price was no less than FMV. Even though 409A and 83 are two separate code sections, with their own regs, in theory IRS would want to interpret consistently. But again, that ammunition would be even better in a ruling request than an exam.

It can be used, but determining whether he can establish his own plan for it would require more facts regarding his other business activities, MGOAdmin.

First, I've never heard of someone doing this, so your client is pretty unique, I think, EBECatty, and the optionee is as well. Second, are you sure that the $9 would go towards the amount paid? Is there a case or PLR on point? (I'm guessing there isn't, given your 409A question, or at least not a recent one.) 83(a) talks about the "amount paid ... for such property," but 83(e)(3) says 83 doesn't apply to the transfer of a nontraded option, so I would be somewhat concerned. You might be under the noncompensatory option tax rules. Third, while it may seem intuitive that this is not a discounted option for 409A purposes, just a partially prepaid option that is not very favorable to the service provider, given that the 409A rules for options are entirely made up by the IRS, I would be very wary of reading into them that the $9 paid for the option privilege is really part of the option exercise price and "in substance" raises the exercise price of the option to FMV without seeking a ruling. Fourth, I would check with my securities lawyer to make sure that the sale of the options complies with state and federal securities laws.

Pre-409A, I would have said that as long as the executive agrees, it has no tax consequences to him/her. Also, transactions like this are done in the context of acquisitions and spinoffs of assets. But this is not an acquisition or spinoff, apparently. After 409A, I'm not sure. I don't think this would cause an accelerated payment (assuming that the obligation is unsecured either way), but most of 409A's rules are stated in terms of service provider and service recipient, and now the obligor will not be the same person as the service recipient, so I would need to give that some thought and run through all of the 409A rules and definitions to see how they would work in this circumstance. Agree on the business issue regarding A's creditors, but unless A is going to become bankrupt shortly, it should not be a fraudulent conveyance, so if it is a problem it should be a problem under A's financing documents, which you should be able to review to see if any covenants are breached. Speaking of bankruptcy, if A is weaker than B financially, could this not be viewed as in effect funding. I don't know. Again, review 409A carefully on this point. IRS has not yet proposed regs on 409A funding. Also, how would B treat the receipt of the assets for tax purposes? Isn't it income to B? I don't think B is going to be able to offset the payment obligation to avoid the income, because 404(a)(5) says no deduction until the executive has income. Also, make sure that A is going to get a deduction on the transfer, because presumably it won't when B pays the executive.

The single member LLC rules say you disregard basically for all federal income tax purposes, so I agree with CuseFan.

Ananda, we've been over some of this ground previously and I think the answer is pretty clear from the above. What is not so clear is what happens after (a) one of the spouse's dies, (b) the plan has gone ahead and, ignoring the prenup, paid the benefit to the other spouse, and then (c) the deceased's children from prior marriage, for example, sue in state court to place a constructive trust on the benefits now in the hands of the surviving spouse, on a theory that, essentially, her state law pre-nup is a contract enforceable under state law requiring surviving spouse to relinquish benefits. I think there is a lot of case law that would support the state law action as described. Again, we've been over this ground before and in a prior post, a couple of years ago, I probably cited few cases you might want to take a look at.

Nate S, in this situation the junior partner, as you call them, would not be able to have his or her own plan. You don't even have to get into the A group affiliated service group rules (which would otherwise apply), because being a partner in a partnership is not a separate trade or business, and the only earned income that the junior partner could use to fund a plan would be the earned income from the partnership, and the partnership is therefore the only trade or business that could sponsor a plan covering the junior partner. The trick with the leased owner situation that the leased owner rule is/was trying to solve is that if you are an independent contractor to a business, even if you own 5% or more of it, then your being an independent contractor is in most situations going to be a separate trade or business that could sponsor a plan for you, plus if the business you are providing your independent contractor services to is not a service business (which would be the only time you would want to do this), the affiliated service group rules would not apply. That's a decent loophole, which is why the IRS left that one part of the 414(o) regs out there as still proposed, even though it withdrew the rest. Of course, the IRS could also challenge whether the services are really those of an independent contractor, as opposed to employee services, although probably in a lot of cases the types of services provided by the leased owner to the business that they own 5% or more of would legitimately be independent contractor services. Also, to make this work the leased owner would have to have other streams of income for their sole proprietorship, otherwise they would probably be in a 414(m)(5) management services group with the service recipient. There are no regulations, even proposed, under 414(m)(5) (the regs that were proposed were withdrawn long ago), but 414(m)(5) is currently in effect through just its statutory language.

Nate S, no, I mean Prop. Reg. 1.414(o)-1(b). It was proposed 30+ years ago, and never withdrawn. The other regs proposed under 414(o) were withdrawn. I think what the IRS was getting at was that they viewed it as abusive for someone who owned 5% or more of a business to provide services to the business as an independent contractor and use the 1099 income to fund their own retirement plan, e.g. a DB plan. Where the rule would apply, it does not taint the entrepeneur's entire plan, just says that they can't use the 1099 income from the business they own 5% or more of as earned income for purposes of calculating their benefit under their plan. They would have to have income from other entities, that they owned less than 5% of, to fund their benefit. It's only proposed and obviously has not been on the front burner for finalization. But it is out there, and as proposed it did not have a prospective effective date.

Brie, certainly not. But leased owner did/does not require service org, just "service recipient" and 5% owner providing non-employee services to it. See Prop. Reg. 1.414(o)-1(b).

austin3515, I think this one has an answer. The 5-year period continues to run and can be fulfilled after the participant's death, as long as the account is not distributed. See Treas. Reg. 1.402A-1, Q&A-4(c). For the rest of your questions, I did not readily find an answer in the regs. There seem to be clear (and different) rules if you're going decedent's 401(k) Roth account to beneficiary's 401(k) Roth account, or decedent's Roth IRA to beneficiary's Roth IRA, but I did not find anything that seemed to directly address decedent's 401(k) Roth to beneficiary's Roth IRA. Hope someone else can shed light.

Under an old, still-proposed section of the 414(o) regs, from 30+ years ago, you'd seem to have a leased owner. They were proposed with a retro effective date. 30+ years ago.

BG5150, I take it that this is an individually designed plan? If so, insist that the firm that drafted it tell you what it means with the employer's acknowledgement. Obviously, the person who wrote it didn't realize that less than/more than leaves out the just than. I'm sure they meant 30% at 2 yrs, 60% at three, anyway. They should probably amend it to say that.

K-t-F, I will assume that the person that did the work (a) was not a party-in-interest/disqualified person so there was no prohibited transaction, (b) was an individual, (c) was not an employee of the plan, and (d) was paid more than $600. I will assume also that the individual was paid by the plan from its own funds, not by the plan sponsor or a plan participant. If all the above is true, I would agree with you that the plan should issue a 1099-NEC.

I had a case involving some of these issues a few years ago. My analysis was that under the Code and regs, the amount was taxable to the participant when it was "made available" under the plan, which by definition was the date when he should have taken it after reaching age 65. In other words, arguably what you have is a reporting W-2 reporting error. That has some messy consequences, however.

EBECatty, I have wondered about this myself. The regs (1.83-2(a)) tell you that the date of income inclusion is the year of the transfer, so here December 20, 2021. That of course would mean that the W-2 for 2021 would include the income. I would think the same for the 941.

Belgarath, I have not looked at this before, but would agree with RatherBeGolfing. They are neither W-2 wages nor 125 deferrals added back to W-2 wages, so I don't think would be included.

On or before the date as of which it wanted to no longer participate in the plan, unless the plan contained a provision that automatically terminated the participation of an entity that is no longer a member of the controlled group, which is sometimes the case. Sure, but for part of the year the plan will be multiple employer, which means you would need to test nondiscrimination differently.

Belgarath, the 457(b) regs do permit an election to defer payment. See Treas. Reg. 1.457-6. You're saying that the plan document did not provide for the election, or that the individual made the election outside the permitted time period?

Depends on what the plan document says, but probably less. Some plans say you have to be a controlled group member to participate, some don't say that. Some have different blanks in adoption agreement for listing controlled group members and non-controlled group members. Amending after end of plan year has issues which would need to be explored. Although your description of the facts lacks sufficient detail for a definitive conclusion, M Norton, probably a brother-sister controlled group.

No. If she made the election in 2022, then I think the answer I originally suggested would be applicable, bito'money.

ErnieG, that case, as you acknowledge in your further comments, does not turn at all on whether the covered individuals are current or former employees. Wait, what? A scheme to pay a bunch of folks with different life expectancies, beneficiaries, work histories, yada yada, does not involve ongoing administration? Maybe arguably no if the employer buys single premium annuities for everyone, but if the thing, whatever it is, would be an ERISA plan if single premium annuities were not used, then presumably it would be an ERISA plan (e.g. for fiduciary requirements of selecting carrier) until all the annuities had been purchased, and then it would be a terminated ERISA plan. Or maybe they should ask an ERISA attorney to look into getting a DOL Advisory Opinion. Nothing is free. It might have some tax issues that could be addressed in a PLR, but clearly the issue that EBspecialist asked is a DOL issue, not IRS.

What's the advantage of this arrangement over having a 404(c) plan? Was the employer so risk averse they didn't want the responsibility of choosing an investment menu and though that making each participant his/her own trustee for account would totally insulate from liability? Did they consider a SEP?

Since unlike a retirement plan a QSEHRA has no trust and is not a taxable entity in itself, I don't know if it can be tainted by past errors if compliance going forward is corrected. I am unaware of any QSEHRA corrections program by IRS. The employer and some of the employees may have tax liabilities for prior years that they need to evaluate and consider. Employees who did not receive benefits because they did not receive notices may also have claims. Would need to be evaluated.