Deferral Election Forms for Partners

[401 Chaos]

I am curious as to others' experience with the most typical style of deferral election form for partners in a partnership with other employees.

We have a client (LLC taxed as partnership) that has traditionally provided for partners to elect either a set % of compensation or a flat dollar amount taken from partner draws or distributions. (This generally mirrors the deferral election form used for regular employees which permits employees to elect either a set % or a flat dollar amount to be taken out for each "per pay period."

One question is that while employees are paid every two weeks, partners generally receive distributions on a monthly basis thus the two groups have different "pay periods" (setting aside the fact that the partners' self employment income cannot truly be determined until year-end).

The real question comes up in that in 2009 partners received some interim draws or distributions (timed around estimated tax dates) in addition to the regular end of the month distributions. Some partners electing a flat deferral amount questioned why 401(k) deferrals were not taken out of these supplemental distributions rather than merely at the end of the month. (Note, partners deferring a % of compensation did have amounts taken out of the supplemental distributions to ensure that the desired percentage of overall compensation was deferred.)

Is there any problem or concern with drafting a separate deferral election form for partners which restricts those electing a flat $ deferral amount to having that amount taken out only from regular partner draws at the end of the month (and zero taken out of any supplemental draws) such that those electing to defer a flat $ amount will have that amount taken out once a month (i.e., 12 times a year) regardless of what their overall draw is each month (and regardless how many separate draw payments are made)?

[Jim Chad]

Everything you suggest doing seems perfectly Ok to me, FWIW.

[MARYMM]

I am curious as to others' experience with the most typical style of deferral election form for partners in a partnership with other employees.

We have a client (LLC taxed as partnership) that has traditionally provided for partners to elect either a set % of compensation or a flat dollar amount taken from partner draws or distributions. (This generally mirrors the deferral election form used for regular employees which permits employees to elect either a set % or a flat dollar amount to be taken out for each "per pay period."

One question is that while employees are paid every two weeks, partners generally receive distributions on a monthly basis thus the two groups have different "pay periods" (setting aside the fact that the partners' self employment income cannot truly be determined until year-end).

The real question comes up in that in 2009 partners received some interim draws or distributions (timed around estimated tax dates) in addition to the regular end of the month distributions. Some partners electing a flat deferral amount questioned why 401(k) deferrals were not taken out of these supplemental distributions rather than merely at the end of the month. (Note, partners deferring a % of compensation did have amounts taken out of the supplemental distributions to ensure that the desired percentage of overall compensation was deferred.)

Is there any problem or concern with drafting a separate deferral election form for partners which restricts those electing a flat $ deferral amount to having that amount taken out only from regular partner draws at the end of the month (and zero taken out of any supplemental draws) such that those electing to defer a flat $ amount will have that amount taken out once a month (i.e., 12 times a year) regardless of what their overall draw is each month (and regardless how many separate draw payments are made)?

When I worked for a law firm partnership, we had separate election forms for staff and partners because they had different pay periods (biweekly and monthly). All elections were for flat deferral amounts - probably because we made the 401(k) contributions to the Plan before the monthly draw amount was finalized. We only took deferrals from the monthly draws, never from the supplemental ones.