Law Firm wants to put away for one of its partners

[Lori H]

a small law firm (3 partners) has a 401(k) plan with appx 20 participants. one of their partners will retire in a few years and they are looking to set aside about $250K over the next 3 years for this partner only. Would a non-qualified plan be a good option? The firm was wanting to write off/deduct any contributions it made to benefit this partner.

[QDROphile]

Nonqualified deferred compensation in a pass through entity such a as a partnership is difficult because somebody (or bodies) gets to pay taxes for the year on the amount "set aside" for the year. Who will that be? The partnership could make a naked promise to pay $250,000 at some future date, but the payment would come out of cash flow at the date of payment. Who will be there to get the expense hit compared to who made the promise?

[Mark Whitelaw]

If the partner is healthy, consider a bonus arrangement (unrestricted or restricted) with the partner personally owning an institutional life insurance contract. Firm gets the deduction. Partner gets a policy with 100%+ cash surrender value of the after-tax cash from the bonus plus minimal death benefit protection. Also available to any of the firm's 401(k) HCE's as a partity restoration convenience with none of the hassle or inefficiencies of a NQDC plan. Keep it simple and efficient.

[Lori H]

Thanks for the replies. This is an PLLC. They get K-1's if that makes a difference.

[MARYMM]

Do they have some sort of "retirement/partner withdrawal" provision in their partnership agreement ? The law firm I worked for did. The retiring partner (with the requisite # of years of service) rec'd a % of the WIP or AR at the time of retirement. Some had been there for many years prior to the establishment of the Retirement Plan (HR-10) and this was a way to provide for them.