Partnership profit sharing plan: Do partners & employees have to

[Moe Howard]

A partnership has a profit sharing plan. Each partner participant makes his own Keogh contribution. Each partner participant is free to find & use any broker and investments that he so chooses. The partnership makes a annual discretionary PSP contribution for the regular employee participants..... however, the regular employee participants are not allowed to choose where their share of the discretionary contribution will be invested (the partnership decides where to contribute the discretionary contribution).

Is this an ERISA violation? Can it disqualify the plan ?

[Jon Chambers]

Ability to direct investment is a benefit, right or feature that must pass coverage testing in order for the plan to be qualified. Since a disproportionate number of partners are likely to be HCEs, I'd suggest you have a problem here.

[Medusa]

Agree with Jon. Check Private Letter Ruling 9137001, 4/24/1991.

[Guest Paul McDonald]

I would bet that there is also a problem with the partners each making their own "KEOGH" contribution compared with the discretionary PSP contribution.

[mbozek]

pzaul: please explain distinction between Keogh and psp contributions for self employed persons for some of us.

[Guest Paul McDonald]

I made the comment because based on the partners doing their own thing regarding investments versus the "regular" participants lack of having the same investment opportunities, I would bet that their individual "Keogh" contributions are likely discriminatory in relation to the percentage that was contributed for the rank and file as a profit share.

As far as a distinction between Keogh and PSP there isn't any really and there hasn't been one in years. All that Keogh stands for is the fact that the profit sharing plan was adopted by an unincorporated business. For awhile, the only reason we still had the word "KEOGH" around was for people to know where to enter the income tax deductions on the IRS forms for a self-employed individual. Now even that has changed (See line item 29 on IRS Form 1040). I do not remember what year they dropped the word KEOGH from the 1040.

How many out there remember the One-Page Keogh Agreements? Those were the days. Again, based on the original comments and the use of the "Retro" term KEOGH, I fear there are more problems than just how this plan is set up for investing plan assets. Do the partners have separate brokerage accounts set-up by any chance?

Again, could be just the tip of the iceberg.

[mbozek]

Paul: I have seen arragements where each partner maintained a seperate HR-10 plan and the firm had a PS plan for all other employees and the HR-10 plans pased the comparability tests required under the IRC. The reason was to permit each partner to invest the assets separately. There has always been an intreperation that the plans were separate pools of assets under 414(l) if the liabilities were separate. Some time the HR-10 plans would be maintained by the partnership for each partner. It was never clear to me whether this was discrimination since each plan was a separate entity and not part of a controlled group. I think the cited PLR is based on an admission that an affilated service group exists which is a different situation.

[Guest Paul McDonald]

Getting off this section a little, but if memory serves a partnership is the business entity that must adopt the plan and not the individual partners. Partners are not a group of "sole-proprietors" so how do you have them each adopt a separate "HR-10" Plan and have the partnership adopt a "PSP"? We talking about a real partnership?

OR, are you saying the partnership adopted a minimum of three plans, one which excludes everyone but one partner, another that excludes everyone other than the other partner, and a third that includes everyone but the partners?

Then you are testing the three plans as if one plan and if you pass, this would allow the partners to invest their assets as they wish, make contributions when and if they feel like it, and the employees are stuck with the investment decisions of the partners?

Still doesn't sound right to me, but then again, I semi-retired from this stuff in 2000. Maybe things changed early this century.

[mbozek]

Paul: I think that the partnership would establish a separate plan for each partner and one plan for the employees with comparable benefits. Each partner invests the assets of their own plan as the sole fiduciary designated by the firm and the firm chooses the investments for the employees plan.