Partnership Owner Issues

[Lou S.]

I hate partnerships. Just needed to say that to start. I've done some seaching but can find anything exactly on point so if this has been covered I'm sorry.

We have a smallish partnership where several of the partners are approaching 70 1/2 for purposes of who is a 5% owner and what comp can be used for benefit pursposes how are "semi-retired" partners treated. That is the partner has no more capital interest and no more profits interest. They are recieving guaranteed payments over a somie time period. The payments are reported as ordinary income on a K-1.

1. Since they have no capital interest and no profit interest are they considered 0% partners for purposes of key, HCE and RMD?

2. They are working though limited hours but receiving large (6 figure) guarnteed payments, can all of that be used for plan purposes since it is considered earned income which looks like it meets the plans definition of includable compensation or is it a violation of the exclusive benfit rule, that is are the partners who are receiving only guarnateed payments considered employees of the partnership? I've read what looks like conflicting guidence in the code and frankly this isn't my area of expertise.

I know what answer the client would like to hear, I'm just not sure it is the correct one.

Any direction would be appreciated.

[Bird]

I tend to agree that they are 0% owners - ownership for partners is based on sharing of profits and capital interest, and, as you note, they have neither. I think they are "employees" in the plan sense of the word; those guaranteed payments should indeed be earned income, IMO.