Plan Covering a Participant by Name

[mming]

Partner 1 of a partnership wants to sponsor a plan but Partner 2 does not want to contribute at this time (they own the company 50/50). There are no other employees. Having Partner 2 sign a waiver of participation may not be the best option, as Partner 2 may want to start contributing somewhere down the line and such waivers I believe are irrevocable. Would it be acceptable for the plan doc to just use the name of Partner 1 as the definition of 'Eligible Employee', and then amend the definition once Partner 2 is ready? Thanks.

[ETA Consulting LLC]

Partner 1 of a partnership wants to sponsor a plan but Partner 2 does not want to contribute at this time (they own the company 50/50). There are no other employees. Having Partner 2 sign a waiver of participation may not be the best option, as Partner 2 may want to start contributing somewhere down the line and such waivers I believe are irrevocable. Would it be acceptable for the plan doc to just use the name of Partner 1 as the definition of 'Eligible Employee', and then amend the definition once Partner 2 is ready? Thanks.

No. Just create an Owners' 401(k) Plan giving each member the 'right to defer'. Also, place each individual in a separate class for allocation purposes. You "may" run into issues when attempting to allocate nonelective contributions to one Partner and not the other. You want the decision to be a employer decision irrespective of the elections of any one partner (in order to avoid the 402(g) limitation on all contributions).

You can design a plan with enough flexibility to have the 2nd partner eligible while not benefiting. Or, you could create an Owner's 401(k) Plan and flat out exclude the 2nd Partner; it'll pass 410(b) and all other tests.

Good Luck!

[mming]

Thank you for your response. A 401(k) plan was one of the types that were being discussed, however they would prefer a PSP, as deferrals don't appeal to the contributing partner (it seems he isn't concerned about decreasing his personal tax liability). To 'exlude' the 2nd partner, perhaps a PSP can be set up that has an allocation group created for each participant (like a new comparability plan), and the decision every year is made to give 0% to Partner 2 - cross testing would pass since there are no NHCEs. Also, the doc would indicate that TH min benefits are only given to non-keys so that Partner 2 wouldn't require an allocation.

[ETA Consulting LLC]

Thank you for your response. A 401(k) plan was one of the types that were being discussed, however they would prefer a PSP, as deferrals don't appeal to the contributing partner (it seems he isn't concerned about decreasing his personal tax liability).

They are taxed as a partnership, right? He's going to experience the same tax treatment whether his contributions go in the plan as a deferral or a nonelective.

To 'exlude' the 2nd partner, perhaps a PSP can be set up that has an allocation group created for each participant (like a new comparability plan), and the decision every year is made to give 0% to Partner 2 - cross testing would pass since there are no NHCEs. Also, the doc would indicate that TH min benefits are only given to non-keys so that Partner 2 wouldn't require an allocation.

I think that you have the answer in your OP. I would just design the plan to exclude the Partner 2 (even if by name) and design the plan to include all employees; since there's only one left.

Good Luck!