Legally domestic partners - filing 5500 EZ?

[Brenda Wren]

My client has a 2-person 401(k) with non-qualifying assets.  The plan covers the business owner and his girlfriend.  We have been filing Form 5500SF.  They are not legally married but are "legally domestic partners".  Not sure what that means.  For years now we've been advising him to obtain the very expensive bonding needed to qualify for the audit waiver.  It's time again to pay the premium again and he is questioning the need for the bonding based on his domestic partnership status.  Any comments, experience or thoughts to share?

[RatherBeGolfing]

You answered your own question.  They are domestic partners, not spouses. 

It is not a one-participant plan.  File on 5500-SF, and yes they need a bond.

[Peter Gulia]

A rule to interpret ERISA § 3’s definition of an employee-benefit plan treats a plan as outside that defined term if the plan covers no employee.

That rule includes these interpretations:

“An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse[.]”

“A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership.”

29 C.F.R. § 2510.3-3(c) https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-3#p-2510.3-3(c)

For better or for worse, law sets up categories and classifications. For example, spouse or not; employee or not.

IF the worker who is not the owner is not the owner’s spouse, one might be reluctant to assume that a plan that covers the worker is not an employee-benefit plan.

While recognizing that TPAs that serve regarding retirement plans provide lots of legal advice, advising about whether two people are (or are not) spouses might be beyond a TPA’s scope.

Likewise, advice about whether a person has an ownership interest because of the person’s relationship to a title-holding owner might be beyond a TPA’s scope.

While the person who or that wants to consider not getting fidelity-bond insurance could consider getting a lawyer’s advice about these and related questions, a fee for that advice might be more expensive than the price of the insurance.

Also, a retirement plan’s fiduciary might consider not treating the two people as spouses for not-ERISA purposes if either person files one’s Federal income tax return as a single person.

This is not advice to anyone.

[RatherBeGolfing]

For Federal tax purposes, the terms "marriage" and "spouse" do not include registered domestic partnerships or civil unions under state law unless denominated as marriage under that state's law.

Many Cycle 2 DC documents included language regarding these other formal relationships, but IRS made providers remove the language for Cycle 3.

See Rev Rul 2013-17 and Notice 2014-19

 

n-14-19.pdf rr-13-17.pdf

[Peter Gulia]

RatherBeGolfing, thank you for adding some helpful information.

About the IRS telling document sponsors to remove text about a party to a civil union or a domestic partnership, was that only for provisions designed to meet a tax law condition that refers to a spouse?

Or, did the IRS tell document sponsors to delete references to a domestic partner even for an optional provision that would not interfere with a tax-qualification condition?

For example, for a participant who made no beneficiary designation and had no spouse, a plan might put a domestic partner somewhere in the order of default beneficiaries (and an adoption agreement might give a user a choice to specify that or a different default-beneficiary provision).

Did the IRS object to a provision like that?

[RatherBeGolfing]

On 12/18/2024 at 1:32 PM, Peter Gulia said:

RatherBeGolfing, thank you for adding some helpful information.

About the IRS telling document sponsors to remove text about a party to a civil union or a domestic partnership, was that only for provisions designed to meet a tax law condition that refers to a spouse?

Or, did the IRS tell document sponsors to delete references to a domestic partner even for an optional provision that would not interfere with a tax-qualification condition?

For example, for a participant who made no beneficiary designation and had no spouse, a plan might put a domestic partner somewhere in the order of default beneficiaries (and an adoption agreement might give a user a choice to specify that or a different default-beneficiary provision).

Did the IRS object to a provision like that?

@Peter Gulia Im not 100% sure.  I know that my document provider removed all mentions of domestic partnership, civil union, and other formal relationships from both basic plan documents and adoption agreements. I have seen similar language in other cycle 2 documents, and while I haven't reviewed the basic plan documents in depth, I don't recall seeing any cycle 3 adoption agreements that include formal relationships that are not marriage.