Partners Funding Contributions

[Dougsbpc]

We administer a Safe Harbor 401(k) plan sponsored by a partnership with 15 physicians and 5 nhces. The 3% safe harbor employer contribution is provided only to nhces and hce non-keys.

The issue here is that every year, one of the 5 nhces become a partner (often with less than a 5% interest). The odd thing is that these partners are often considered nhces because the prior year they were an employee making $80k. This would then force the less than 5% partners to fund their own 3% safe harbor contributions as well as at least an additional 2% employer contribution to meet the minimum gateway.

With this odd scenario happening, the managing partner wondered if they could have language in their partnership agreements indicating that any partner nhce will be responsible to fund their own safe harbor and other employer contributions

 

[Bird]

I think you stated accurately what happens, so I'm not sure why language would be needed, other than as clarification; i.e. it's not changing anything.

Although, I believe if this is done 100% correctly, the partnership would pay for the employer contributions covering the period of time that the new partner was an employee and not a partner. And slicing it finer, it seems that such cost would be assessed to the partners who were partners at that time (i.e. the new partner would not share in its own contribution cost for the time s/he was an employee)...because it is really a new and different partnership every time a new partner comes on board (or leaves). But that's just my understanding; I'm not an accountant and over my skis a bit on this. I'm not sure the accountants want to be bothered with those different calcs either. So maybe that's the point of the language change; to clarify and simplify.

[Luke Bailey]

Dougsbpc, I'm a little confused as to whether you want the new partners' contributions to be fundeded specifically by them or not. However, most partnerships will provide that the expense of a partner's retirement contribution is specially allocated to him or her under Section 704 of the Code. If it does not say that, then the expense would probably need to be allocated based on income share or capital, but it would really depend on what the partnership agreement says. You need to read what is actually in this partnership agreement. There's a lot of freedom there. But again, most will provide for specific allocation to the partner whose account is receiving the contribution. As Bird says, that would cover only the period during which they were a partner.