partner sells ownership but still works for company, can he take distribution?

[Guest Jennyb473]

I have a plan that has about 15 physician owners. One of them is contemplating selling off his ownership interest in the company to allow him to take a distribution from the 401k and DB plans. He wants to sell his ownership interest but continue to work for the company (in some sort of non-partner capacity). He brought up the legality of doing that because of the "same desk" rule. That rule was changed in 2000 or 2001 but I'm not sure what he is wanting to do would fall under either the old or the new law. He would still be working for the same company, no merger or acquisition, just change in ownership. I see this as if he terminates he can take a distribution and if he is rehired later he will become a participant again. Am I not seeing the big picture or is he trying to do something that just won't work?

[ETA Consulting LLC]

The same desk rule is irrelevant. Either he is still employed or not. Selling ownership doesn't mean that you're no longer employed. So, unless he terminates employment (or meet some other requirement for inservice distributions from the plan), he would not be able to take a distribution.

Good Luck!

[Guest Jennyb473]

thanks! that is how I wanted to see this too, but have to do the research to prove my case!

[jpod]

Perhaps he is contemplating a new relationship to the plan sponsor as an independent contractor, rather than a partner or employee, in which case the answer may be different. (Note: Physicians and other professionals have a greater leeway from IRS to be treated as ICs as compared to other workers.)

[masteff]

He brought up the legality of doing that because of the "same desk" rule. That rule was changed in 2000 or 2001 but I'm not sure what he is wanting to do would fall under either the old or the new law.

Speaking only to this piece... The law was changed by Section 646 of EGTRRA from "separation from service" to "severance from employment". And it applies if the plan was amended to correspond w/ this change.

[QDROphile]

"Physicians and other professionals have a greater leeway from IRS to be treated as ICs as compared to other workers."

While I don't completerly disagree with the statement, I will observe that physicians are legendary for their abuse and disregard of the law. This situation has that smell about it.

A relevant IRS ruling on sham terminations involved a dentist. Close enough.

[david rigby]

Either he is still employed or not.

Pretty good summary.

Check the plan document for any definitions that help define distributable event (although that phrase may not be used). Severance from employment will be one of those events, but there might be other relevant definitions.

[jpod]

QDRO, I agree, which is why I said the answer "may" be different. If it's a sham it won't work, and frankly the OP's framing of the issue suggests that the sole motivation of the new arrangement is to get his pension money, in which case it probably would be a sham. On the other hand, selling out of his interest in the practice seems like a very drastic step just to get his pension money, so perhaps OP's framing of the issue is not correct. Maybe he just wants "out," but the most convenient way for him to continue to his personal practice is as an IC working through the group practice, or maybe not even an IC but just as a tenant. The devil is in the details.