RMD - Partnership of Professional Corporations

[JJRetirement]

I have a question about determination of 5% owners for purposes of RMD rules.

Law firm partnership has a 401(k) profit sharing plan. Several partners have P.C.s that have adopted the plan as participating employers. The owner of one of these P.C.s has just attained age 70 1/2 in 2015. He owns less than 5% of the partnership by capital interest or profits, but of course own 100% of his P.C.

For testing purposes, all of the employers of the plan are aggregated under 414(m). Does aggregation apply for determining 5% owners for 401(a)(9) purposes? 5% owners are defined as under the top heavy rules, and aggregation applies for top heavy, but does that mean aggregation applies and only those who own 5% of the partnership are treated as 5% owners for RMD purposes?

Put another way, is this partner's first distribution calendar year 2015 or will it be deferred until the calendar year in which he retires?

[mbozek]

I don't know if there is an answer for this Q. One way to look it is if the PC merely adopted the Law firm plan as a participating employer who is a member of the controlled group then the PC owner could claim that his ownership interest in the employer who established the plan was less than 5%. If on the other hand his PC is deemed to have established its own plan by signing the adoption agreement then he could be considered a more than 5% owner of the plan his employer adopted. Language of plan and adoption agreements will be crucial.

[JJRetirement]

Thanks mbozek.

The plan references 416 for the 5% owner definition because 401(a)(9) also references 416 for this purpose. The plan's definition of Employer includes participating employers who have adopted the plan. But the definition of required beginning date in the plan doesn't refer to the capitalized employer.

I think I now see the answer in the top heavy regs. T-17 Q&A from 1.416-1 says that the rules of subsection (b), ©, and (m) of section 414 do not apply for purposes of determining who is a 5% owner.

For my case, I think that makes the owner of the PC a 5% owner of the participating employer, so he is required to take distributions starting for 2015 (by 4/1/16)

[JJRetirement]

This could lead to unexpected results. If the firm were large - let's say 100 partners, each of whom is a P.C. owning a 1% interest in the partnership, and each P.C. has adopted the plan, would there be one hundred 5% owners even though the partnership itself has no 5% owners?

[Mike Preston]

I don't know why you think that would be an unexpected result. Seems like the natural result of a PC owned by 1 person being an adopting employer.

[JJRetirement]

I see your point. I shouldn't think of the ownership in the partnership by each P.C. as having any importance in the determination of 5% owners.

Thanks.