equity and non equity partners

[Chippy]

In a Law Firm, document is written that each participant is in their own group

The plan has always been run grouping the participants into groups and then allocating the same percentage to each group. Group one is equity partners, group two is non-equity partners earning over 260,000, group 3 is non-equity partners earning less than 260,000. Group 4 is all other employees. The first two groups receive the max, the second two groups, the minimum to pass testing.

The plan is changing in that the non-equity partners are getting younger and do not want to contribute a large contribution to the plan. They receive their income on a K-1. From what I've read, the equity and non-equity partners can decide individually on what percentage they put in the plan. Has there been any problems with this in an audit? Non-equity partners that are not considered HCEs still must receive the minimum to pass gateway, correct? (this is a Safe Harbor Plan and uses top paid group).

If they would switch their payroll in that the non-equity partners would receive a W-2 instead of the K-1, would that change anything?

Any helpful hints on running a new comp plan for partnerships would be appreciated.

Thank you.

[Tom Poje]

if the plan was set up so each person was in their own group, it is an area that might be tough to prove one way or another .
at one ASPPA conference years ago the response was something like
"We will know abuse when we see it"
the lrm from a few years ago (see next to last page) warns that you have to be careful with such an arrangement

ft William incorporates this language for 'each person in their own group' as follows

NOTE: In the case of self-employed individuals (i.e., sole proprietorships or partnerships), the requirements of Treas. Reg.
section 1.401(k)-1(a)(6) continue to apply, and the allocation method should not be such that a cash or deferred election is
created for a self-employed individual as a result of application of the allocation method.

...................

no such language is in the document if the allocation is by groups rather than each in their own group.

based on your description it sounds like you have a few groups, not each person in their own group.

lrm.pdf

[John Feldt ERPA CPC QPA]

the non-equity partners are getting younger

Great, I can only imagine how this will affect their mortaility table.

I don't see how they can decide to receive a W-2 or K-1. I'm of the understanding that you are either a partner in a partnership and thus the profits/losses are controlled/attributed by/to you (K-1 applies), or that you are an employee and the use of profits/losses are not controlled by employees.

Regardless, each NHCE receiving any nonelective allocation is thus required to receive the gateway (unless they are under 21/1 and the OEE rule is applied). Because you have each person in their own rate group for allocations, they do not all have to max out even if other similar employees are maxing out. The plan could exclude the HCEs from the 3% SH nonelective. By doing this, if the plan is also not top heavy, you do not have to give the gateway to any employee who is not getting any nonelective allocation.

If the non-equity partners are considered as NHCEs because the 20% TPG election being applied, perhaps removing the TPG election will help.

[Chippy]

Tom, The document is written that each person is in their own group. For the allocations, the participants were grouped for the percentage of contribution allocated. That way there could be no cash or deferred arrangement and for the past 8 years it has worked. This year, some of the younger non-equity partners are saying they do not want to put in the maximum %. I had read somewhere that with a partnership, each partner could determine what % of contribution they wanted to make, and if someone wanted to not make a contribution that it was ok not to. Are there any problems if they do that? There are 10 non-equity partners, could they each do their own thing when it comes to the employer discretionary contribution? When would they have to determine the amount that they would like to put into the plan?

[John Feldt ERPA CPC QPA]

The partnership must determine and approve the amount to allocate, not the individual participant.

Same problem exists with a sole prop. The sole prop must determine the amount, not the participant. Has the IRS tried to make an actual case against this for any plans?

[chc93]

The non-equity partners "can" do whatever they want. The problem now is that each non-equity partner can "select" his contribution level. If done "by himself", it can appear to be a CODA. If done by the pension plan administrative committee, it might "appear" OK. Which is Tom's reference to the IRS response of "we willl know abuse when we see it".

[Tom Poje]

yes, I sense a problem if one non equity partner gets 0 and another gets 30,000. it begins to possibly fail the scratch and sniff test if the IRS looks at it. it sounds like a large deferral.

if it ended up all non equities got 0, but the document has each in its own group....well if the equity partners have different amounts it probably still would fail a smell test

again, it is a gray area, could be tough to prove one way or another,

(of course, such comments come from 'the Grinch' so that might only be a step above a three eyed fish. however, such comments are based on what is in the lrm/documents, or at least the best I can read them)

[Chippy]

So it sounds like the non-equity partners will have no choice but to continue to put an ER discretionary contribution into the plan. Not what they wanted to hear..........

How about zero to highly compensated non-equity partners, and the minimum for NHCE non-equity partners?

[Kevin C]

The deemed CODA issue was discussed as Question 4 at the 2011 ASPPA annual conference IRS DC Q&A Session. The IRS representative's answer will probably surprise you. If you can get access to the recording, it's worth listening to. In this case, it's a good surprise. The IRS concern with a deemed CODA came from an unusual plan design, not from the typical new comparability plan. But, it's worth repeating that the PS contribution decision is made by the employer, not the individual participants.

[TPApril]

piggybacking on the theme of this topic of equity v non-equity partners in a x-tested MP plan:

Ee becomes non equity partner at start of yr., but is NHCE.

The plan allows partners to receive less than 5% and even 0%.

Is such a non equity NHCE partner required to receive minimum gateway of 5%?

[Mike Preston]

If and only if they receive $.01 or more then they must receive the gateway.

[TPApril]

So they are excluded from the x testing completely then?

[Mike Preston]

Why would you say that?  Wouldn't they be like any other not benefitting but not excludable employee?  That is, they are included in the tests with a zero benefit.

[TPApril]

that's a good question. because I wasn't thinking? I also wasn't thinking of top heavy minimum requirements...

[Mike Preston]

There's your $0.01.