For minimum distribution, what date’s ownership counts to determine a 5%-owner?

For minimum distribution, what date’s ownership counts to determine a 5%-owner?

Here’s my not-entirely hypothetical:

A partnership is the plan sponsor and only participating employer of an individual-account § 401(a)-(k) retirement plan. The plan year is the calendar year. The partnership’s tax year is the calendar year. Every partner is on the calendar year for one’s tax year. The partnership has no mandatory retirement age, nor even a presumed ordinary retirement age.

A working partner will reach age 73 during 2027 (and expects to continue working into her 80s).

“For purposes of section 401(a)(9), a 5-percent owner is an employee [including a deemed employee] who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains the applicable age.” 26 C.F.R. § 1.401(a)(9)-2(b)(3)(ii) (emphasis added) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(9)-2#p-1.401(a)(9)-2(b)(3)(ii).

Does this mean the measurement date is December 31, 2026?

Under the partnership agreement, a partner’s capital interest can change any day. For example, a partner might get distributions from capital, or even might withdraw capital. A partner’s profits interest, if measured as a percentage of the partnership’s profit, can change because the partner’s interest is measured by several factors, including (for a relevant year or other period) the partner’s revenue generation to her practice, expenses specifically allocated to her practice, origination credits for having introduced a client to another partner’s practice, and a proportionate share of the partnership’s general overhead allocated to all practices.

The plan’s administrator wants to get the measurement date right so it neither fails to meet § 401(a)(9) nor unnecessarily (and improperly) directs an involuntary distribution the plan does not provide.

BenefitsLink neighbors, how’s my guess?

Peter, are you asking when the determination of 5% ownership gets made? I don't know for certain, but drawing a parallel to the HCE rules I would say if they are a 5% owner at any time during the applicable calendar year (2027). 

CuseFan, thank you.

The minimum-distribution rule (quoted above) says “who is a 5-percent owner (as defined in section 416) with respect to the [described] year[.]”

That’s why I imagine that the measurement date might be one that would be used to determine the key employees for a § 416 top-heavy test.

If a plan’s administrator tests whether a plan is top-heavy for 2027, is December 31, 2026 the date for counting a participant’s ownership to determine whether she is a key employee in the 2027 test?

1 hour ago, Peter Gulia said:

If a plan’s administrator tests whether a plan is top-heavy for 2027, is December 31, 2026 the date for counting a participant’s ownership to determine whether she is a key employee in the 2027 test?

Yes, if its a calendar year plan.

5 hours ago, Peter Gulia said:

A working partner will reach age 73 during 2027 (and expects to continue working into her 80s).

“For purposes of section 401(a)(9), a 5-percent owner is an employee [including a deemed employee] who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains the applicable age.” 26 C.F.R. § 1.401(a)(9)-2(b)(3)(ii) (emphasis added) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(9)-2#p-1.401(a)(9)-2(b)(3)(ii).

Does this mean the measurement date is December 31, 2026?

Isnt this simply saying that you apply the definition of 5% owner in Section 416 to the period defined in 401(a)(9)?  It doesn't say anything about a determination date  (which is also in Section 416, but in a different section from the 5% owner definition).  Instead, apply the 5% owner definition (416(i)(1)(B)(i)) to the period defined in 401(a)(9) (the plan year ending in the calendar year in which the employee attains the applicable age.)

5-percent owner - 416(i)(1)(B)(i)

For purposes of this paragraph, the term "5-percent owner" means-

(I) if the employer is a corporation, any person who owns (or is considered as owning within the meaning of section 318) more than 5 percent of the outstanding stock of the corporation or stock possessing more than 5 percent of the total combined voting power of all stock of the corporation, or

(II) if the employer is not a corporation, any person who owns more than 5 percent of the capital or profits interest in the employer.

Determination date - 416(g)(4)(C)

The term "determination date" means, with respect to any plan year-

(i) the last day of the preceding plan year, or

(ii) in the case of the first plan year of any plan, the last day of such plan year.

My guess was based on imagining that the § 401(a)(9) statute’s and rule’s reference to § 416 might bring in the whole of § 416, including § 416(g)(4)(C)(i) about the determination date being the last day of the preceding year. Internal Revenue Code § 401(a)(9)(C)(ii)(I) refers to the whole section, not a particular subsection, paragraph, subparagraph, clause, or subclause. Not § 416(i)(1)(A)(ii), and not § 416(i)(1)(B)(i).

Also, I’m imagining the text-interpretation aids that every phrase ought to bear meaning, and that a different usage suggests a difference in meaning.

Internal Revenue Code § 401(a)(9)(C)(ii)(I) speaks “of an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains the applicable age[.]”

Internal Revenue Code § 414(q)(2) provides: “An employee shall be treated as a 5-percent owner for any year if at any time during such year such employee was a 5-percent owner (as defined in section 416(i)(1)) of the employer.”

If to determine a minimum-distribution 5%-owner Congress meant “at any time during” the applicable-age year, an interpreter might presume Congress would have said so; they knew how, because they did it in § 414(q).

And if the look at ownership is not “at any time during” the applicable-age year, it must be at some date—for example, the first day of the year, the last day of the year, or, by bringing in § 416’s determination date, the last day of the preceding year.

Except for selectively reading the statute’s and rule’s texts mentioned above, I’ve not yet done research on this. I’ll wait until nearing the end of 2026. The partner’s capital and profits interests could change before 2027, or even before the last day of 2026.

Thank you for helping me think about this.