Another Individual (k) Question

[Guest EAS]

If there is a business partnership (equal ownership) consisting of three people can each one of three partners open their own Individual (k) or would there have to be one Individual (k) plan set up for all three partners? Please advise.

Thank You

[austin3515]

You can set up one plan for each them. But beware if you ever hire any employees as this will totally mess everything up.

Why not set up one new comparability plan, with each owner as their own allocation group? As there are no NHCE's you never worry about nondiscrimination and each owner does whatever the heck they want.

Just make sure that when you declare the annual employer contributions it is a corporate action - not an individual election - if it is an individual election you have a "deemed CODA" which is very very bad. For example, all three owners should annually sign a Corporate Resolution indicating what each partners employer contriubtion would be. Of course the 401(k) portion of the Plan would be based on the owners election.

[Blinky the 3-eyed Fish]

I smell noncompliance coming. The whole "Individual 401(k)" product is designed to fit in a little teeny box. In that box is the fact that those offering this product will file the 5500-EZ for the client. Also, in that box is the use of a standardized prototype document. In that box is one brokerage account.

Your situation is outside of that box and most of the providers of this service will have no idea what to do. You need to consult an real TPA, not some guy with a box.

If I were the IRS, I would audit a large sampling of "Individual 401(k)'s" in about 5 years.

[Appleby]

I am pretty sure that it is the partnership that must establish the plan and not individual partners - can’t put my hands on a cite right now

A partnership would be eligible for the 5500-EZ ( assuming the plan covers only the business owners, which must happen in the case of the Individual (k) Plan)

[Blinky the 3-eyed Fish]

You are right on both counts, but it's moot for this situation because of the other problems. Although, often times a partnership will have the individuals separately incorporated or they will be separate entities, which of course often is a controlled group/affiliated service group and negates the EZ.