Partnership Pension

[MarkCTX]

General partnership has 3 partners. All the partners meet the age and service requirements for a pension plan. The way the pension contributions work is that the pension portion is carved out of current compensation subject to the limits. This may be monthly or quarterly. It's an election each partner can make. Two partners have pension contributions taken out and the third wants to wait until the end of the year to make her decision. If the third partner decides not to have any contributions withheld for 2014, do the other 2 still qualify for a retirement/pension deduction? I'm using Pub 560 as my guidance. By definition the partnership is the employer and each partner is an employee. I would think the non-contributing partner (employee) would need to sign some sort of waiver to confirm her election each year. Does anyone have any experience with an arrangement like this?

Mark

[Burke]

What type of pension plan does the partnership have?

[MarkCTX]

As it turns out the partnership has a SEP IRA arrangement. It completed a Form 5305-SEP as the basic plan document. Looks to me like they need a new written plan to allow for this type of retirement arrangement. The SEP IRA rules call for each employee to have his/her own account. The partnership does not have to make contributions each year, but it they contribute to one partner, they must for all eligible partners/employees. What the partners want to do may qualify, but the written plan needs to spell all that out clearly. Does that conform to your thinking?

Mark

[Burke]

As I read the OP, you were talking about (pre-tax) elective deferrals from compensation by the "employees?" Was this plan established prior to 1997? Because they are not allowed after 1996. The plan should spell out all the rules and specify what the partnership will contribute and when. It appears if 50% of the employees participate (i.e, 2 out of 3) it is acceptable. Some plans allow discretionary contributions by the employees, but they may not be wholly deductible by the employee depending on limitations, etc.

[MarkCTX]

The plan was set up in 2013. If the partnership wants to use the 5305-SEP as their written plan, the partnership must contribute to each partner's SEP-IRA. But the way the intent was explained to me is they want to carve out from each partner's earnings and profits a contribution to a SEP-IRA. Seems to me like they need a different boiler plate plan other than Form 5305-SEP. As I read the literature, each partner cannot be considered self-employed for the purpose of establishing his/her own SEP-IRA independent from the other partners. If they could, that may solve the problem. Your thoughts?

Mark

[Burke]

I think the answer to your questions may be found in a previous thread titled "Employer SEP Contribution" started on 7/8/14. Pay particular attention to the response from DaveInTexas, and cites IRM 4.72.17.6 (9/12/2006) and IRC 408(k)(5.) It was also noted in that thread, that the SEP had to consist of employer contributions only. See also a discussion of 401(k) plans titled "401K Contributions Not Deducted" on 8/1/14 in this forum. Perhaps that is the plan they are actually looking for?