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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Professional Partnerships

(Posted March 13, 2002)

Question 140: A medical partnership exists for emergency room physicians and has no employees. The doctors may perform services at various hospitals. Each doctor/partner gets income from this medical partnership. Can any of the doctors form a corporation and use the income from the medical partnership to fund the corporation? Could each of these corporations have its own defined contribution plan?

Answer: Certainly, yes. The plans will even be qualified!

Partnerships of professional corporations have been with us for a long time. It is a well recognized and legitimate technique. If they weren't available, there would be little need for the affiliated service group rules.

And clearly this would be an affiliated service group. The partnership and the corporations each would be service organizations. The corporations each would be partners in the partnership and would regularly perform services for the partnership. This is a classic A-Org style affiliated service group.

But what does it mean that there is an affiliated service group? It simply means that all of the entities will be treated as a single employer for qualified plan purposes.

Which brings us to this question: If the partnership, in its current configuration, wanted to set up a separate defined contribution plan for each doctor, could it do so? Yes. Why not? There are no nonhighly compensated employees, so you automatically pass 410(b) and 401(a)(4).

And, if the partnership as a single unit could do so, so can the affiliated service group. The only difference is that each professional corporation would have its own IRC 404 deduction limit (see Q&A 36).

For more on the affiliated service group rules, see Chapter 13 of my book, Who's the Employer?.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.