same old 414 game?

[gregburst]

Joe is a 10% owner of a partnership. He gets paid $300,000 per year from the partnership (on a K-1). The partnership has non-highly-compensated employees. Joe wants to establish a pension plan for just himself. My initial response is NO.

Joe asks if it makes a difference if his $300,000 is paid to an LLC that he'll set up rather than to him directly. His hope is that this other entity, that has no employees, can establish a plan for just him. My response is still NO.

Joe asks, "What if I get paid $0 on my K-1 as a passive partner, and then the partnership pays me $300,000 on a 1099 for the actual work I do; can I set up a plan for just me with this 1099 income as an independent contractor?" "Or what if I get paid $0 on my K-1 as a passive partner, and then the partnership pays $300,000 to my newly established LLC for the actual work I do; can the LLC then establish a plan for just me?"

None of these pass the smell test to me, but after a while my head starts spinning. Is there some way to set this up so that Joe's plan doesn't have coverage issues?

[Guest A_Dude]

Scratching head..... I'm not seeing it. I'm pretty sure this is percisely the situation on why the ownership rules exist. Somone on this forum may hopefully have some insight on a way around though....

[jpod]

No need to worry about Section 414 rules. The fact is that he is deriving his income by as a partner in the firm, and so he can't set up a plan for himself. The firm can set up a plan for him, but of course it would fail to satisfy 410(b) and 401(a)(26). Putting his compensation on a 1099? That might temporarily (or even permanently) disguise his relationship to his firm, but it doesn't change the fact that he is a partner in the firm and deriving his income as a partner in the firm, not as an independent contractor, notwithstanding the arguably fraudulent tax reporting.

[shERPA]

No way around it, he is a partner in the firm and the firm is the employer, he is the employee of the firm - 401©(4) I think. He can set up an LLC or a corporation and make it the partner in the firm and he can be the employee of the entity, but then it is a classic A-org ASG - 414(m) - ownership, service orgs, regularly associated - all the boxes are checked.

If it were that easy to get around these rules, everyone would be doing it this way, right?

[Bantais]

On 12/13/2013 at 9:50 PM, gregburst said:

Joe is a 10% owner of a partnership. He gets paid $300,000 per year from the partnership (on a K-1). The partnership has non-highly-compensated employees. Joe wants to establish a pension plan for just himself. My initial response is NO.

Joe asks if it makes a difference if his $300,000 is paid to an LLC that he'll set up rather than to him directly. His hope is that this other entity, that has no employees, can establish a plan for just him. My response is still NO.

Joe asks, "What if I get paid $0 on my K-1 as a passive partner, and then the partnership pays me $300,000 on a 1099 for the actual work I do; can I set up a plan for just me with this 1099 income as an independent contractor?" "Or what if I get paid $0 on my K-1 as a passive partner, and then the partnership pays $300,000 to my newly established LLC for the actual work I do; can the LLC then establish a plan for just me?"

None of these pass the smell test to me, but after a while my head starts spinning. Is there some way to set this up so that Joe's plan doesn't have coverage issues?



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You’re right to be skeptical—this is a tricky area. Generally, under the IRS rules, if Joe is a 10% owner in a partnership with non-highly-compensated employees, it’s very difficult to establish a qualified pension plan just for himself without running into coverage issues. The plan has to satisfy nondiscrimination rules, which are designed to prevent owners from benefiting disproportionately compared to rank-and-file employees.

Setting up an LLC to receive the income or recharacterizing the income as 1099 or K-1 doesn’t really change the underlying issue. The IRS tends to look through these arrangements to see if the substance is really the same—i.e., Joe is still economically benefiting from the partnership income. So creating an LLC or paying himself differently probably won’t help avoid coverage requirements.

One potential path might be to consider a solo 401(k) or a defined contribution plan through an entity where he truly has no employees and is genuinely self-employed. But the moment the plan is tied to the partnership income or the partnership itself, coverage rules kick in.

Bottom line: there’s no simple “loophole” here. Any plan connected to partnership income with employees will likely trigger nondiscrimination rules, so Joe would need to either accept a broader plan covering employees or establish a separate entity where he is legitimately self-employed and has no other employees. Consulting a plan attorney or ERISA specialist is essential before trying any of these maneuvers.