Compare partner goals with plan compensation, staff costs and testing. Evaluate contribution designs using the same census and funding assumptions.

February 3, 2025 · Financial Forte Staff

Historical article: prepared retrospectively using information available as of February 3, 2025.

Business partners can agree on the company's direction and still want different retirement contributions. One may be approaching retirement and seeking substantial funding. Another may need current income for family expenses or prefer to reinvest in the business. Those preferences are legitimate, but they do not by themselves establish a permissible plan allocation.

Begin with the partners' goals, then test them against compensation, plan terms, employee coverage and the business's funding capacity. A negotiated understanding among owners needs to become a design the administrator can operate for the entire eligible workforce. The objective is a workable benefit, not a promise that every owner can select any employer contribution.[1]

Separate personal deferrals from employer allocations

In a 401(k), eligible participants can make different employee-deferral elections within the applicable limits and plan rules. Employer contributions are governed by the plan's formula and other requirements. A partner choosing a smaller personal deferral does not automatically authorize redirecting the corresponding employer contribution to another owner.[1]

Confirm the compensation used for each partner. The partnership is treated as the employer for retirement-plan purposes, and partner earned-income calculations require the applicable self-employed adjustments. Cash distributions, ownership percentages and retirement-plan compensation are not interchangeable measures.[1]

An older partner may have a catch-up opportunity that a younger partner does not. That personal limit difference is separate from a proposed age-sensitive employer allocation or a defined-benefit design. Keep each mechanism labeled so the conversation does not blend several rules into one contribution request.[2]

Also identify employees across the relevant businesses. Ownership and related-employer rules can affect who must be considered. A plan proposal based only on the partners' information may miss staff costs and testing requirements that change the result.

Calculate the cost of the stated formula

Elise and Marco are working partners in this hypothetical business, which also has eligible employees. For this illustration, assume the administrator has established $200,000 of plan compensation for Elise, $100,000 for Marco and $400,000 for the employees in total. Those are supplied plan-compensation figures, not an instruction for calculating self-employed income.

Assume a permissible uniform employer contribution of 10% of that compensation. Elise would receive $20,000, Marco $10,000 and the employees $40,000, for a total employer cost of $70,000. Employee deferrals and catch-ups are excluded from this illustration.

Elise would prefer a $40,000 employer contribution. Simply increasing the same uniform rate to 20% would produce $40,000 for Elise, $20,000 for Marco and $80,000 for employees, totaling $140,000. Her additional $20,000 would therefore accompany an additional $50,000 for the others: $10,000 for Marco and $40,000 for employees under this particular formula.

That result does not mean the employee contribution is wasted or that the uniform formula is wrong. It shows what the chosen design costs. The partners should evaluate the benefit for staff and the total funding commitment, rather than describing the proposal as merely Elise adding $20,000.

Marco's willingness to accept less does not automatically solve the issue. Any alternative must follow a permitted design and satisfy the relevant qualification and testing requirements. The plan administrator should evaluate the complete proposal before either partner treats the desired allocation as available.

Compare alternatives with the same workforce data

A different qualified-plan design may allow a different allocation, depending on the census, ages, compensation and applicable tests. A profit-sharing design using permitted allocation groups, or a combined defined-contribution and cash-balance arrangement, can require more technical work than a uniform percentage.[1][3]

Do not translate “age can matter” into a guarantee that an older partner will receive any requested amount. Have the administrator or actuary provide a tested illustration showing owner contributions, employee contributions, fees and funding obligations. Ask which assumptions drive the result and what changes when someone joins or leaves.

Compare alternatives using the same census and economic assumptions, and separate a projected contribution from a legally required funding amount. A proposal that omits an eligible employee or uses a different compensation estimate can appear cheaper without representing a genuine improvement. Include administration and any actuarial costs alongside contributions.

For a cash-balance or other defined-benefit arrangement, understand the funding requirements and consequences of a weaker business year. The annual contribution may not have the same flexibility as a discretionary profit-sharing contribution. A larger deduction should be weighed against the ability to maintain the commitment.[3]

The partners also need a business decision about how costs affect their economics. That belongs in the appropriate partnership and tax discussion. It cannot override the plan's benefit obligations or be solved merely by describing one person's contribution as their private expense.

Document the decision and monitor the result

For an ERISA-covered plan, design choices and fiduciary administration are related but distinct. Choosing the benefit structure is generally a business decision; operating the adopted plan, managing plan assets and overseeing providers can involve fiduciary duties. Follow the applicable responsibilities rather than assuming owner agreement completes the process.[4]

Record the selected design, the accepted cost range, the data used and who will review actual contributions. Ask the administrator to show the effect of a plausible new hire or compensation change, then revisit the projection after material hiring, compensation or ownership changes. Communicate the employee benefit accurately and avoid promising an allocation before it has been confirmed.

A useful annual review compares projected and actual employer cost, identifies testing exceptions and checks whether the benefit supports the company's workforce goals. Retention may be one objective, but contribution size alone does not prove the plan caused employees to stay.

Start with a shared statement of each partner's goal and a complete employee census. Then ask for a small number of comparable, tested designs. That gives the partners a concrete choice about retirement funding, staff benefits and business cash flow instead of a negotiation built around amounts the plan may not permit.

Related reading

Have more questions about partnership retirement plan design and employee benefits? Email Dave at dave@financialforte.com to discuss your questions and next steps.

The contact invitation is current; it does not imply this contact path existed on the historical reference date.

Educational information, not personalized investment, tax, legal or benefits advice. Examples use hypothetical assumptions. Verify current rules and your circumstances before acting.

Sources

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