Easy Q? Why Can't Partners Establish uni/solo-DB With SE Income?

[namealreadyinuse]

Ok, this should be a very easy question to shoot down, but I searched this board and didn't find anything.

Partner of a service partnership gets K-1 and "friends" have told him he can set up a uni-DB plan with the self employment income. Partner particpates in the partnership 401(a) plan. Assume no income other than the k-1, but does that matter? Is it a 415 problem or an affiliated service group, etc. issue? I know it can't be possible because everyone would do it, but can't figure it out this morning.

Thanks!

[Mike Preston]

401a26

[Guest CharlieLaur]

An individual partner in a partnership cannot establish a retirement plan -- the plan must be established at the partnership level and must then take into account all employees of the partnership.

[JAY21]

Charlie's right, though the partner's personal pension deduction is taken on the partner's personal 1040 return (not the partnership return) as a self-employed Keogh deduction. Perhaps the confusion lies with where the partner's deduction is taken even though the plan is still sponsored by the partnership and must cover most/all of it's employees. The partnership only reports deductible pension expenses on the partnership return for the non-owner participants (the owners report it on their own 1040 as aforementioned). Don't confuse deduction issues with the actual sponsorship and employee coverage and participation requirements which are all still on the partnership level (not personal level), even though the owner deducts his own contribution on his personal 1040 return.

[namealreadyinuse]

That is a great help, Jay, thanks! That makes perfect sense if the partnership has a plan, but how can I prove the folllowing:

An individual partner in a partnership cannot establish a retirement plan -- the plan must be established at the partnership level and must then take into account all employees of the partnership.

I don't think that (a)(26) is the issue fro a uni-DB plan is it?

Thanks again for the help!!

[saabraa]

The first sentence of IRC section 401(a) says that a qualified plan is a plan of the employer for its employees.

401(a)(26) participation is a problem if there's more than 1 otherwise eligible employee, aside from the one partner being discussed. Must cover at least 40% of the eligible employees, even if they're all HCEs.

[JAY21]

The problem is the owner is not the employer (i.e., he's not a Sole Proprietor but rather a partner in a partnership) and the plan has to be sponsored at the business level (under whatever structure the business is set-up under). An individual cannot sponsor a qualifed plan.

Even for a one-man Sole Proprietorship it isn't the owner "personally" sponsoring the plan (Uni-DB) but rather the Sole Proprietorship as a business is sponsoring the plan. That's a fine line distinction between the owner and the business entity but a critical one.

Bottom line is he would need to be an owner of an business entity with no employees to sponsor a "Uni-DB" plan just for himself.

[BeckyMiller]

See regulation 1.401-10(e)(1) which specifies that a partner may not set up a plan with respect to his or her services to the partnership.

[namealreadyinuse]

Great answers (and cite Becky), thanks!

Any ideas if using PCs established by the individual partners changes the answer?

[Guest CharlieLaur]

If the partner is the individual's corporation rather than the individual himself, the corporation may legally adopt a qualified plan for its employees, which will usually be just the individual.

However, if the individual corporation must be aggregated with the partnership because of the rules in IRC Section 414 (controlled group, ASG, etc...), then the employees of the partnership must still be taken into account in determining whether the corporation can adopt a plan.

Technically, the individual has improved his situation but in reality he may still be precluded from doing a qualified plan.

[JAY21]

I agree with Charlie's answer on settting up individual corporations.