How does one know whether a partner was employed on the last day of a year?

[Peter Gulia]

A profit-sharing retirement plan has a last-day condition on who shares in an allocation of a discretionary contribution.  The employer is a partnership, and many of the employer’s workers are partners rather than employees.  For the last-day condition, the plan’s governing document refers only to whether the participant is “employed” on the last day.  The partnership keeps no records of a partner’s time worked.

 

How does one determine whether a partner was employed on the last day?

 

Was a partner “employed” on the last day of a year if she had not been deadmitted from the partnership (and had for the year earned income more than zero)?

 

What rules should I worry about?

 

[jpod]

Employed would mean either employed or being a partner.  Why wouldn't it be obvious?  There should be some clear indicia to resolve this one way or the other. 

[Peter Gulia]

jpod, thank you for helping me think.

Being a partner isn't enough to make one a deemed employee for a retirement plan; there must be at least some personal services.  Unlike a law firm, this partnership has some partners who do not provide (and never had provided) any personal service.  Yet some of the partners who have provided personal services also made other contributions of money or other property (or both) in exchange for his or her partnership interests.

How does an HR employee who acts for the employer/administrator determine that a partner who previously performed personal services has stopped performing them if distributions to the partner are computed on factors other than work?

Is a partner who previously performed personal services a deemed employee until he or she is deadmitted from the partnership?  Or is something more than having been a partner on the last day of a year needed for one to be treated as having been "employed" on that day?

[jpod]

Ok, agreed in this scenario it's a puzzle.  I think you just take your best shot and where it's murky err on the side of not providing an allocation for any such individual who is an HCE for the plan year.

[Bird]

I think if someone had earned income and was still a partner at the end of the year I would consider them as employed.

[Peter Gulia]

jpod, thank you for the observation about how an administrator might use its discretion to avoid a question about non-discrimination (if it can do so while also meeting ERISA's fiduciary duties, including impartiality).

Bird, thank you for weighing in with your respected view.

 

 

 

[BG5150]

I agree with Bird.  Unless there was some sort of agreement (in writing) that the person would cease performing services for the company prior to year end even though they are still a partner.

[Larry Starr]

Partnership income is deemed earned on the last day of the year.  Unless there has been a removal of a partner during the year, if that partner has earned income for the year he is employed at the end of the year for these purposes. Remember, in a 401(k) he could defer right until 12/31.

[Luke Bailey]

I agree with the preceding posts to some extent. There will be provisions in the partnership agreement that will determine whether the person is still a partner at the end of the year. The individual will likely be listed as a partner, or not, in a schedule, and his/her removal as a partner will be effective on a specific date.

But I'm not sure if that's the question, since the word "employed" is not only ambiguous, but downright inappropriate, as applied to a partner.  To prevent this sort of ambiguity, I usually include, in plans for law firms or similar entities, that a partner must still be actively providing services to or in connection with the partnership, or available to do so, in order to be considered eligible for an allocation as of a particular allocation date. This avoids a potential nondiscrimination issue where you would effectively have different standards for partners than for employees with respect to allocation eligibility, since a partner who had effectively stopped working for the partnership might still be a partner for some purposes, e.g. for receiving a share of the firm's receivables for a trailing period, or sharing in the appreciation of some of its assets if his/her capital account had not yet been paid to him/her.

[Peter Gulia]

I wish a plan’s sponsor would ask me to help design and document its plan.  Nowadays, that happens with governmental plans and plans for select-group executives, but on plans that could fit the IRS’s § 401(a) and § 403(b) “preapproved” regimes only for mega plans.

 

Luke Bailey, thank you for your idea of writing (or interpreting) a plan to treat a partner as meeting a last-day allocation condition if she then was available to perform services.

[Earl]

Does he have a Partner % on the K-1 as of the end of the year?

If its 0%, that would make it clear.

[jpod]

I think what FDG is getting at is a situation where the individual is still a partner but no longer doing anything to generate net earnings from self-employment.

[Peter Gulia]

My working assumptions are:

 

There are many ways one might contribute money, rights, or other property to obtain partnership interests.

 

A partner might have contributed more than one kind of property.

 

A partner might (or might not) have an obligation to perform services for the partnership.

 

A partner might (or might not) have a right to perform services for the partnership.

 

For a partner who performs services, exactly when she performs might be unmeasured.

 

Even for a partner who contributed nothing beyond her services, when a partner is paid an amount might not bear a close or obvious relation to when she performed services that bear some relationship to how the amount (or a portion of the amount) was determined.

 

Again, thanks everyone for aiding my thinking.

[Luke Bailey]

Peter, you are spot on.