Who is an Owner for RBD

[Guest BWORC]

Is it true that the measurement date for whether a Participant is an owner (as defined in Section 416) for RBD purposes is made just one time: in the year that the Participant attains age 70 1/2?

If so, then someone who was a partner but non-owner as of the date he became 70 1/2 and who later becomes an owner through the retirement of other partners (i.e., 20 partners at 70 1/2, 19 partners (including this Participant) in subsequent year), this person must only take a distribution in the year that he stops working?

Same result if he was an owner at age 70 1/2, but then becomes a non-owner because of the election of new partners, he or she must still take the MRDs?

Or, do you take a new look every year? Which seems problematic as an administrative and practical matter, but probably not impossible.

Thanks.

[Tom Poje]

well, if you go by 1.401(a)(9)-2 Q-2©

a 5% owner is an ee who is a 5% owner with respect to the plan year ending in the calendar year in which the ee turns age 70 1/2.

[GMK]

a previous discussion:

http://benefitslink.com/boards/index.php?/topic/51996-rmds-and-more-than-5-owners/

[Guest BWORC]

Thank you both.

One further question, the definition in 416 says the owner of a more than 5% capital or profits interest. In a partnership where partnership distributions are determined annually as a percentage of profits and are based on productivity, is that profits interest determined annually even though the capital interest of that partner may be fixed? That is, someone who receives a 6% profits distribution one year and 4% the next, even as she owned a 5% capital interest, would be determined to be an owner for RBD purposes on profits distribution in the year in which she turned 70 1/2?

Thanks.

[ETA Consulting LLC]

Nothing would change. The "definition of 5% owner" is one of several criteria. You'd match the individual against each of those criteria in order to determine if he's a 5% owner or not. This analysis is done only once; in the year the individual turns age 70 1/2. It's not done in subsequent years.

Good Luck!

[Guest BWORC]

Thanks, ERISAtoolkit.

To get a little deeper, if the individual's capital interest is fixed (that is, there are 20 partners, each has an equal interest and, on a capital interest test, none is an owner), but each year profits are distributed based on the assessment of the individual's contribution to the company's success. These distributions are not described as a distribution of a profits interest but, in essence, that's what they are. Each year the distribution to each partner is allocated by the managers subject to approval by a vote of all the partners. Resulting question: if this allocation to an individual is greater than 5% in a given year, is that partner an owner for RBD purposes if that's the year he reaches age 70 1/2? I have PLR 200524032 which says, "with respect to calendar year 2004, his capital interest in Law Firm B was Percentage 1, and his profits interest was Percentage 2, Neither Percentage 1 nor Percentage 2 equaled or exceeded 5." This confirms that the year matters, but it does not describe or define profits interest with respect to my concern. Any ideas or other authority to consult?

[ETA Consulting LLC]

These distributions are not described as a distribution of a profits interest but, in essence, that's what they are.

No, they are not. Look at it like this:

1)Assets plus Liabilities = Capital.

2) Therefore, Capital = Assets minus Liabilities

3) You have established that each year, 20 members share equally (5% each, but not more) in that capital.

4) Profit is the "increase in capital" for any one member.

Therefore, you and I can own a business 50% each. I can perform 2080 hours of work at $10,000 per hour and the business can make $120,800 in revenue. After paying me $10 per hour ($20,800 for the year, a salary expense) the company will have a profit of $100,000; which is retains. Both of our capital interests has increased by $50,000 (50% each). The fact that I worked and received $20,800 does not mean I received more profit (because that did not increase my capital interest in the company).

Hope this helps.

Good Luck!

[masteff]

but it does not describe or define profits interest with respect to my concern.

Is the problem that you're uncertain about the words "capital or profit interest"?

You might review Schedule K-1 Line J

Form: http://www.irs.gov/pub/irs-pdf/f1065sk1.pdf

Instructions: http://www.irs.gov/pub/irs-pdf/i1065sk1.pdf

Also Rev Proc 93-27 http://pmstax.com/ftp/part/rp9327.pdf or http://www.tax-charts.com/charts/rev_proc_93_27_print.pdf

Beyond that, do your best to do what's reasonable and err on the side of being conservative..

This article from 2007 discusses the fact that "profit interest" is lacking sufficient definition in the Code and Regs.

http://www.kattenlaw.com/files/Publication/f8cac11d-17f7-45ba-9914-14b15c8f5772/Presentation/PublicationAttachment/e7ee46a8-dc9f-40c3-abbd-17882c37da78/Banoff_MAG_03-07.pdf

[Bill Presson]

These distributions are not described as a distribution of a profits interest but, in essence, that's what they are.

No, they are not. Look at it like this:

1)Assets plus Liabilities = Capital.

2) Therefore, Capital = Assets minus Liabilities

I don't think this math works!

[ETA Consulting LLC]

You're right.

Assets minus Liabilities = Capital

Assets = Liabiliities Plus Capital

In my haste, I was attempting to get to Capital = Assets minus Liabilities.