1065 K1 Partners / Schedule C Proprietors / Plan Assets

[austin3515]

The Applicable DOL Reg:

Quote

(1) General rule. For purposes of subtitle A and parts 1 and 4 of subtitle B of title I of ERISA and section 4975 of the Internal Revenue Code only (but without any implication for and may not be relied upon to bar criminal prosecutions under 18 U.S.C. 664), the assets of the plan include amounts (other than union dues) that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution or repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer's general assets.

Partners ARE the employer so they have no wages.  You can't withhold something from yourself.

So pretty clear that they are not subject to this.  My question is this: Why can't find anything that says this, like a DOL Notice or an IRS FAQ or an article by a big law firm?  Does anyone have anything to point to?  I know the reg is pretty clear but this can't be the first time the topic has come up as an interesting question.

[Peter Gulia]

The quoted rule states: “the assets of the plan include amounts . . . that a participant or beneficiary pays to an employer, or amounts that a participant has withheld from his wages by an employer, for contribution or repayment of a participant loan to the plan, as of the earliest date on which such contributions or repayments can reasonably be segregated from the employer’s general assets.” 29 C.F.R. § 2510.3-102(a)(1) (emphasis added) https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-102#p-2510.3-102(a)(1)

That something doesn’t perfectly fit the illustration’s description doesn’t mean it’s not plan assets.

For how the rule applies regarding a participant who is self-employed, many interpretations of the text are possible, and some might be plausible.

Perhaps a respectable interpretation is that the illustration describes a general concept about amounts withheld from a worker’s wages or other compensation.

That was the Labor department’s explanation in one of the several rulemakings (1988, 1996, 1997, 2010):

“[Two commenters] ask when the monies, which otherwise would be paid to a partner, but for the partner’s election, become plan assets, inasmuch as partners do not receive wages. In the view of the Department, the monies which are to go to a section 401(k) plan by virtue of a partner’s election become plan assets at the earliest date they can reasonably be segregated from the partnership’s general assets after those monies would otherwise have been distributed to the partner[.]”

Regulation Relating to Definition of “Plan Assets”—Participant Contributions [final rule], 61 Federal Register 41220, 41226 [middle column] (explanation § 6(c) Partnerships) (August 7, 1996) https://www.govinfo.gov/content/pkg/FR-1996-08-07/pdf/96-19791.pdf.

A court might be persuaded by the Labor department’s explanation of its rulemaking.

Labor’s interpretation would not matter if the rulemaking is contrary to the Administrative Procedure Act or Congress’s delegation in ERISA § 3(42) is contrary to the U.S. Constitution article I section 1.

About what’s published, I doubt a big law firm is eager to publish an interpretation that would counter the Labor department’s published interpretation, even if Labor’s interpretation might be incorrect or improper.

This is not advice to anyone.

If I were a partner in a law firm and the firm subtracted from my interim draw an amount I specified for a § 401(k) deferral but the firm didn’t promptly treat that amount as plan assets, I’d pursue my rights.

[Paul I]

This issue has been addressed by each both the IRS and DOL.  See IRS §1.401(k)-1(a)(6)(iv) and DOL Advisory Opinion 99-04A.

[austin3515]

https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1999-04a

I saw this but I cannot figure out where the relevant part is.  Anyone?

Also this is the 100% owner of the business.  I see the point of course about PriceWaterhouseCoopers (just to use an example that makes sense to all of us) withholding partners money and holding onto for it for 6 months... But this is definitely that.

[Peter Gulia]

Treasury Reg. (26 C.F.R.) § 1.401(k)-1(a)(6)(iv) allows § 401(k) elective deferrals from an advance on compensation not yet determined. The Treasury’s interpretation of Internal Revenue Code § 401(k) does not interpret ERISA § 3(42)’s definition of plan assets.

ERISA Advisory Opinion 1999-04A (Feb. 4, 1999) expresses Labor’s Pension and Welfare Benefits Administration’s view “that there is nothing in the definitions of Title I of ERISA that would preclude a pension plan . . . from extending plan coverage to ‘working owners,’”, such as self-employed individuals Internal Revenue Code § 401(c) treats as deemed employees. This Opinion does not interpret when a working owner’s participant contribution becomes plan assets.

Yet, those interpretations suggest treating a working owner as if she were an employee, as nearly as reasonable for the question of law involved, with some tolerances for differences about a self-employed individual’s compensation.

[Peter Gulia]

For ERISA Advisory Opinion 1999-04A, a multiemployer pension plan asked “individuals who own business enterprises, either wholly or in part[.]”

[Peter Gulia]

So we learn something together (and only if you can describe a situation without revealing your client's identity or other confidence):

For which task in a retirement plan's administration does one seek to discern when a working owner's amount withheld for a participant contribution becomes plan assets?

[austin3515]

Truth be told this was a question from an auditor I am friends with, so I don't even know the identity!

This is what I can tell you.  I have been a TPA for about a million years.  Partners fund their contributions at any time through the date of their 1040 due date (or partnership return if earlier) and the words "late deposit" never left my lips in those conversations.  And I don't think I missed anything by not mentioning it.

Tell me I'm wrong :).

[Peter Gulia]

A punctilious independent qualified public accountant auditing a plan’s financial statements might consider these points.

If a partner’s participant contribution—even if timely enough for Federal income tax purposes—was not paid over to the plan’s trust or otherwise treated as plan assets until long after the specified amount was segregated (or reasonably could have been segregated) from the partnership’s assets AND the contribution lacked an adjustment for lost investment value, should the financial statements’ narrative (but not the displays) note a contingent gain, describing (but not putting an amount on) the restoration that belongs to the plan?

Even if the narrative omits a note about a contingent gain, should the plan’s financial statements note a related-party transaction or a nonexempt prohibited transaction because the partnership had the use of what was plan assets?

Under AICPA guidance, an IQPA must read the plan’s administrator’s Form 5500 report to consider whether it seems reasonably consistent with the audited financial statements. Some IQPAs read the response to the Schedule H query “Was there a failure to transmit to the plan any participant contributions within the time period described in 29 CFR 2510.3-102?” If the administrator’s response is No when the IQPA thinks a truthful answer ought to be Yes, the IQPA might not release its “clean” report.

Further, some auditors might treat what the auditor finds is a less-than-truthful response as a reason to doubt management’s honesty or control, even about other information.

I recognize these and other points are way beyond norms for small-business retirement plans. But you mentioned it’s an auditor who seeks your help. So I’m spinning out a little imagination about why an auditor might question when a partner’s participant contribution becomes plan assets.

[austin3515]

There is no lack of trust here, no one is worried about this, they just want to know what the right answer is. 

[Peter Gulia]

Many questions have no one “right answer”.

But if one seeks a mainstream answer, it’s what the Labor department published:

“In the view of the Department, the monies which are to go to a section 401(k) plan by virtue of a partner’s election become plan assets at the earliest date they can reasonably be segregated from the partnership’s general assets after those monies would otherwise have been distributed [paid] to the partner[.]”

Once one knows the partner’s payday:

“[I]n the case of a plan with fewer than 100 participants at the beginning of the plan year, any amount deposited with such plan not later than . . . the 7th business day following the day on which such amount would otherwise have been payable to the participant in cash (in the case of amounts withheld by an employer [the partnership] from a participant’s wages [or self-employed compensation]), shall be deemed to be contributed . . . to such plan on the earliest date on which such contributions . . . can reasonably be segregated from the employer’s general assets.” 29 C.F.R. § 2510.3-102(a)(2)(i) https://www.ecfr.gov/current/title-29/part-2510/section-2510.3-102#p-2510.3-102(a)(2)(i).

Simplified example: A partner of International Man of Mystery LP gets a monthly draw, paid on the 15th of each month (or the next day that is a regular business day for both the partnership and the bank it uses). Vanessa Kensington’s draw is $100,000 a month. For 2026, Vanessa specified an elective deferral of $3,000 a month through October, and $1,250 in each of November and December. On May 15, 2026, the partnership pays Vanessa $97,000. The $3,000 not paid to Vanessa is included in the money paid to the retirement plan’s trustee 12 days later on May 27, 2026. Applying the small-plan safe-harbor rule quoted above, that delay would be deemed reasonable.

I confess that’s a simplified example in many ways, including that the date a partner’s self-employed compensation is paid might be ambiguous.

Many might reason that a partner’s draw during a year is not pay (at least not in a sense of treating it as akin to an employee’s wages) because it might be an advance against anticipated self-employment income, not yet determined, which might not be realized.