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Subject Author Date
Separate one-participant 401(k) plan for each partner? Mark Freeland 10-02-2007
Posted by Mark Freeland on October 2, 2007, 10:09 pm
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 Is it permissible for business partners (no employees) to
set up separate 401(k) plans for themselves, as opposed to a
"one-participant" or regular 401(k) plan for the
partnership?

The 5500EZ wording is a bit ambiguous on this point. It
says that one can set up a "one-participant" plan for
oneself (or oneself and one's spouse) if one owns the entire
business. But it doesn't say "only if". And it does say
that one can set up a "one-participant" plan for one or more
partners.

The ambiguity is in the intent. Is the intent of the
partner plan to allow the plan to exclude some partners, or
is the intent to allow them to set up their own plans
independent of the partnership (using draws from the
partnership to fund)?

Formr 5500 EZ instructions - Who may file Form 5500EZ
http://www.irs.gov/instructions/i5500ez/ch01.html#d0e144

Thanks,
Mark Freeland

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Posted by Benjamin Yazersky CPA on October 3, 2007, 5:25 pm
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> Is it permissible for business partners (no employees) to
> set up separate 401(k) plans for themselves, as opposed to a
> "one-participant" or regular 401(k) plan for the
> partnership?
>
> The 5500EZ wording is a bit ambiguous on this point. It
> says that one can set up a "one-participant" plan for
> oneself (or oneself and one's spouse) if one owns the entire
> business. But it doesn't say "only if". And it does say
> that one can set up a "one-participant" plan for one or more
> partners.
>
> The ambiguity is in the intent. Is the intent of the
> partner plan to allow the plan to exclude some partners, or
> is the intent to allow them to set up their own plans
> independent of the partnership (using draws from the
> partnership to fund)?
>
> Formr 5500 EZ instructions - Who may file Form 5500EZ
> http://www.irs.gov/instructions/i5500ez/ch01.html#d0e144

The rules governing 401k's include tax laws & pension law.
There are requirements regarding who has to be covered in a
retirement plan. Depending on the type of plan and the form
of business entity (corp, partnership, proprietorship etc)
different rules may apply.

Guessing that you are referring to a 2 person partnership
scenario, I'd guess that each one could be able to set up
his/her own plan.

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----

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<< The foregoing was not intended or written to be used, >>
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<< that may be imposed upon the taxpayer. >>
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Posted by kastnna on October 3, 2007, 5:25 pm
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Mark,

I will first admit my lack of official expertise in this
matter. That said, my simple answer is no.

It is my understanding that a 401k cannot be setup to
exclude eligible individuals without violating
non-discrimination tests. Therefore, a business with
eligible employees cannot prevent them from participating in
the company plan. Of course, by including profit sharing
trusts, social security integration (permitted disparity),
etc, you can definitely make the plan favor the owner.

For owner-only businesses a solo 401k (a.k.a i401k, soloK,
individual 401k) is an option. They are self-directed plans
eligible to businesses that have only owners (and their
spouses) but no other "eligible" employees. They are not
subject to nondescrimination or top- heavy testing if all
employees are 5% or greater shareholders and/or "highly
compensated". However, you are still not allowed to prevent
the other owners from participating.

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Mark Freeland on October 9, 2007, 8:28 pm
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Thanks for the responses. A few brief comments:

Benjamin - yes, right now I'm looking at a two person
partnership (actually an LLC, but for most purposes, that's
the same as a partnership). No reason why it couldn't
expand a little, though. One of the issues I see is with
sponsorship - the employer, not the employee, must sponsor a
401(k) plan. With a partnership, that would seem to be the
partnership, and not each individual. So this may be
doable, but tricky.

Kastnna - there are at least some situations where a company
can have different 401(k) plans with different sets of
eligible participants (e.g. when one company acquires
another, it may inherit a separate 401(k) plan). That
doesn't prove that one can have multiple plans in my
situation, but it does show that multiple plans are not
prohibited per se.

Normally, antidiscrimination testing is a moot point in a
partnership, because the partners are all HCEs (as 5%
owners). What makes this situation so interesting is that
that isn't the case here.

If this were strictly hypothetical, it would make for some
interesting debates.

Again, thanks for the thoughts and information.

Mark Freeland
BnetOnewsX@sbcglobal.net

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
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