Electing out of a plan

[Guest taj32z]

Question:

The employer is a Partnership. One of the partners would like to elect out of the employer profit sharing contribution portion of a 401(k) Profit Sharing Plan, but still defer in the 401(k) portion of the plan. Is this allowed?

Thanks.

[MGB]

What will happen once elected out? Will his part of the partnership income be adjusted for this? If that is so, then I don't think it is proper because you are treating the profit sharing as an elective deferral.

[Guest taj32z]

The partnership income would increase by the amount of contribution the partner who is wishing to opt out of the profit sharing portion of the plan would have received.

It didn't sound like it would be something that this person would be allowed to do, but I can't find anything in writing stating so.

Thanks for your help.

[MGB]

The way my logic was going, the issue is constructive receipt. If the partners are allowed to change from getting a profit sharing contribution to cash (without it being an allowable cash or deferred arrangement), then those that are getting the profit sharing contribution "may" be determined by the IRS to be in constructive receipt and have to pay taxes. So, the actions of one partner end up causing a tax liability for the others.

[Mike Preston]

Amend the plan to provide that the partner is excluded from the PS contribution.