partner deductions

[Gary]

new plan

2 partners and a few employees

the employees costs are deducted on the partnership return.

one partner has a target normal cost of 60k and the other has a TNC of 100k.

The partners want to deduct 80k each and amend benefits to eventually be equal.

if partners agree i dont see problem with above.

any thoughts out there?

thanks

[SoCalActuary]

Well this is an accounting rule within the partnership. If both are equal partners and this is a DB plan, by default they would share the costs based on ownership percentage. You would need a special agreement within the partnership to do otherwise, if I understand the rules correctly.

[Gary]

i have also spoken to practitioners who believe the allocation is based on value of benefit

of course, if deduction and partnership are a 50/50 basis, then, one partner may have a benefit of higher value than the other (depending on design).

There are a couple of regs (not sure if most appropriate) that discuss this:

1.404(e)-1 and 1.404(e)-1A. not sure which one applies as they both seem to be in connection with self employeds and one reg seems to indicate that it is split based on value of pension while 1A seems to indicate that it is allocated based on ownership percents.

actually, 1A seems to supersede 1.

thanks

[SoCalActuary]

Generally for a DC plan you can make an easy determination of the benefit to each partner. So the IRS took the simple approach of allocating their cost on their DC allocation of contribution.

But DB plans are more complex. In today's funding rules, you can easily determine the target normal cost by participant, but even then you might have to allocate that benefit among multiple participating employers.

For really big partnerships, the accounting can be awful, so the IRS took the easy way out here, and stated a position that DB costs are too difficult to allocate consistently, so split it by equity interest.

With cash balance formulas, that complexity got a lot easier allowing partnerships to allocate their pension cost more directly. But it is still not an exact accounting procedure, because it fails to deal with over-funding or underfunding.

[ScottR]

I think this is an area where the IRS would accept any reasonable method for allocating contributions. The cost for employees should clearly be split 50/50. But I think you have some wiggle room WRT the contributions for the partners. Most likely, a 50/50 split wouldn't be questioned (IMO).

... Scott

[Belgarath]

Seems to me that 1.404(e)-1A(f) is relatively clear - it is based upon each partner's distributive share, as determined under Section 704. To be honest with you, we've never gotten into the details of how it is determined under 704 - we leave this to the CPA/client.