Can a partner have a separation from service?

[Dowist]

If a partner withdraws from a partnership, is that a "separation from service" that would allow the partnership's 401(k) plan to pay the former partner's elective contributions to him/her?

[BeckyMiller]

The special concept of a partner and separation from service is found in IRC Section 402(d)(4)(A) where the flush language at the end specifically states that a self-employed person is not eligible for a lump-sum distribution on account of separation from service. The 401(k) rules do not include this restriction.

It is always difficult to determine exactly when a self-employed person has separated from service. However, in the context of a partnership where personal services are no longer being rendered AND there has been a complete distribution of the partner's capital, it seems pretty clear that there would be a separation from service. Other cases can become more clouded (e.g. capital is not fully distributed), but I have never seen the Service raise this issue.

The special provisions in the 401(k) regulations covering plans of partnerships do not make any distinction on this matter.

[Dowist]

BeckyMiller - thanks for your reply, which makes a lot of sense.

Your analysis depends on the assumption that the partnership is the "employer" and by leaving the partnership, the former partner has a separation from service. This makes sense, although it is somewhat inconsistent with the concept of the partner being self-employed. Perhaps the way to reconcile these is found in Code ss 401© which says that a "a patnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (1)" - which says that self-employed individuals are treated as employees for the qualified plan rules.

All this is to say, I agree, and thanks.