IRS 736(a) income, can a db plan be set up?

[Jakyasar]

Partner Joe (over age 70) retired in 2017 from partnership XYZ, LLC (a large law firm) and started receiving IRC §736(a) payments (distributive share or guaranteed payment under IRC §707(c)) for a period of 48 months and in form of k-1. These payments are subject to self employment tax.

Joe also has clients on the side that he is consulting with. Not sure how he is paid yet but can assume schedule c.

Joe wants to start a pension plan on both incomes, can he (how about only on the k-1 he is getting from XYZ, LLC)? The plan will be for 2019, 2020 and 2021.

From an article I found online written in 2017 (not the code - could be related to 736(b) - no taxation of income - not posting the article not sure if can be done - please let me know if possible and will do so): Note: The type of retirement program (between Joe and XYZ, LLC) discussed here is not a tax-favored partnership retirement plan such as a 401(k) plan, Keogh plan or SEP plan. Instead, we are talking about a relatively simple written arrangement (generally unfunded) under which payments are made by the partnership directly to its retired partners. Such an arrangement is not subject to any of the complicated funding and nondiscrimination rules that can potentially apply to a tax-favored partnership retirement plan.

Thank you for your comments.

[Luke Bailey]

Jakyasar, I think the income from the LLC he retired from is good self-employment income for purposes of 401(a) plan contributions, but the plan has to be of the LLC from which he retired, i.e., the trade or business that gave rise to the income. See Code sec. 401(c)(2)(A)(I) and related reg. Also, for 415(c) purposes it probably has to be paid within 2-1/2 months after termination of active service, although I'm not sure there's any guidance on application of the "severance from employment" phrase to a retiring Subchapter K partner. See Treas. reg. 1.415(c)-2(e)(3). He can't establish a plan of his own just for that income, or use the income to fund contributions to a plan of his sole proprietorship/Schedule C business, if he establishes a plan for that. Note that the plan of the LLC that he retired from should contain a provision to effect that a partner who receives trailing receivables payments after retirement under 736(a), but who does not currently work for the partnership, is not eligible to participate in the plan immediately upon cessation of active membership as a service provider, assuming that's what they want to do, which most do. If the plan document does not specifically address, they may have a difficult interpretational issue as for tax purposes, he is still a partner, but they probably do not consider him as such, e.g. he may not have a capital account, has no rights to participate in control of firm, etc.

[Jakyasar]

Mr. Bailey

Thank you for your comments.

If I am understanding you correctly (and also agree), Joe cannot do a separate defined benefit plan for himself under this 736(a) income. He is not part of any plan from the XYZ, LLC (not that I am aware if they have one).

As far as I am aware, one needs to be their own entity to have a qualified pension plan and not thru a separate firm (could be some circumstances for exceptions - may be).

My thinking was, if Joe does not have his own EIN (schedule c or some other entity, how could he set up a DB plan from a severance pay that he is paid from his ex firm.

If you have any further comments/correction to above, I would very much appreciate it.

Regards,

[Luke Bailey]

No further comments, Jakyasar. Good luck.

[Jakyasar]

Thank you, appreciate it.