Top Heavy for Partners

I have a law firm that has approximately 25 partners.  There are a few that are more than 1% owners but their net earned income is below $150,000 and this makes them non-key.  Is the law firm required to fund the top heavy minimum or is this an obligation of the partner who is a non-key employee?

The partners are still self employed, so the source of their TH contribution doesn't change compared to ordinary profit sharing.

I've not had that scenario, but it's intriguing that they're stuck having to make a contribution for themselves.

Ultimately the Partnership that sponsors the Plan is responsible for making the top-heavy contributions. How they make individual partners come up with the money to fund the contributions for employees and partners would likely be governed by the Partnership Agreements.

Isn't a partner the only one who can take the deduction for his/her own contribution, while the partnership agreement covers each partner's share of the staff's cost?

12 minutes ago, Bri said:

Isn't a partner the only one who can take the deduction for his/her own contribution, while the partnership agreement covers each partner's share of the staff's cost?

I'm not a CPA but that's my general understanding.

That said what does the Partnership do if the Partner says I'm not making that or I don't have the funds right now? To avoid a Plan Qualification issue if I'm the Partnership I'm pretty sure I'm making that contribution on the partners behalf and working out the financial accounting of "charging back the partner" or whatever the technical accounting term is afterwards if I have to.

Gotcha.  "They work it out." 

The partnership contributes the cash out of partnership assets, and then allocates the cash cost for partners (and staff) in accordance with the partnership agreement. I am pretty sure that for virtually all partnerships, the partnership agreement will say that the total staff contributions are allocated based on each partner's percentage share of profit (like rent, salaries, etc.), but on the other hand most partnerships will say that the contribution for an individual partner (deferral, match, nonelective) are individually allocated to that partner, reducing the cash that otherwise would be distributed to him or her by exactly the amount contributed for him or her. So, e.g., if A and B are both 2% partners, and A defers and gets a match, but B does not so gets no match, B does not pay any of A's match. Same for a nonelective, where one partner's nonelective is higher than another's, or DB where contributions for different partners differ based on age or other criteria. The income tax deduction follows the cash, however allocated.

I am aware of some partnership agreements that do not individually allocate partners' nonelective, match, or pension contributions back to them as an individual item. 

Bottom line answer to your question, nancy, is that it is very likely that each of the partners receiving the top-heavy contribution will fund their own allocation as a reduction of the profits individually distributed to them in cash, but this will depend on the partnership agreement and the individuals' status as equity vs. nonequity partners.