Can one partner elect-out of participation in the partnership's retirement plan ?

[Moe Howard]

A partnership has two partners and five employees. Partner #1 wants the partnership to establish a retirement plan, partner #2 wants no retirement plan.

Partner #1 has been told that he and partner #2 should dissolve the partnership and each of them should establish their own sole-proprietorship. The two sole-proprietorships would continue to operate the business as usual at the same location, same five employees, they would establish a joint checking account to collect fee income and pay operating expense, all income and expenses would be split 50/50, each would file an annual Form 1040 Schedule C. However, since the two sole-proprietorships would share the five employees and each would pay one-half of the employees' annual salary.... then each employee would be receive two W-2s each year (one from each of the two sole-proprietorships). This would then

allow the former Partner #1 to establish a plan for himself and the employees, but the eligible compensation for those employees would only be the salary that his sole-proprietorship pays them. Will this work? Does IRS and ERISA allow such a "shared employee" arrangement ?

It would make things a lot easier if the partnership remained in place and Partner #2 simply elected out of any plan. Does IRS and ERISA allow a plan document to state that someone who meets the eligibilty requirements of a plan ... can elect-out of participation ?

I guess it depends on the type of plan. This plan would be a PSP(discrtionary contributions) with a 401(k) feature.

[Belgarath]

Assuming the document allows it, I don't see a problem with your approach. The IRS does allow a waiver of participation - I've seen it in tons of documents. The docs I've seen do require that the waiver be signed PRIOR to satisfying the reguirements for eligibility. I don't think it is generally allowed in Standardized prototypes (I say generally because individual reviewers sometimes let some unusual provisions slip through) but I've seen lots of Non-Standardized prototypes (and of course Custom and VS documents) that allow it.

[pmacduff]

Why not set up a cross tested allocation method plan design with each partner in his/her own group? This allows you to use different allocations by group and the one partner could be "0". Just a thought...

[Blinky the 3-eyed Fish]

And a good thought at that.

Whomever came up with the convoluted idea of splitting the partnership for this should be flogged.

[TBob]

This may be out of the realm of the expertise on this board but if the partners are splitting income and expenses equally between the two...would not partner #2 be stuck with half of the expense of the employer contribution to the plan.

I think that the cross tested scenario or the "elect out" idea mentioned above work fine but there may be reasons outside of the plan that may not work for Partner 2.

[pmacduff]

Tbob - Good point with a 50/50 split, but since the Partnership pays and deducts the NHCE allocation as an expense it could benefit Partner #2 as well (by reducing taxable Partnership income??) Although I see your point and I suppose it's true that they do end up "paying" a portion of the HCEs, however it really comes out of the profits of the partnership and not them individually. I'm no accounting expert, tho' and as you mention it might not be feasible in all cases.