PLANS FOR SPECIAL TYPES OF ORGANIZATIONS

Plans Covering Partners and Proprietors

Under federal tax law, partners and proprietors (sole owners) are not considered employees of their unincorporated business, even if they perform substantial services for the business. By comparison, shareholders of a corporate business who are employed by the business are considered employees for retirement planning and other employee benefit purposes. For many years, there were restrictions on the benefits available from a qualified plan to partners or proprietors. Special plans called Keogh or HR#10 plans were used if partners or proprietors were covered. Since 1983, most of these restrictions no longer apply, and qualified plans can cover partners and proprietors on virtually the same terms as regular employees of the business.

S Corporations

An S corporation is a corporation that has made an election to be treated substantially like a partnership for federal income tax purposes. Certain shareholder employees of S corporations were once subject to qualified plan restrictions similar to those for partners and proprietors; however, after 1983, most of these restrictions do not apply. Thus, as with partners and proprietors, S corporation shareholder-employees are now treated basically like regular employees for qualified plan purposes. However, an S corporation employee who owns more than 2 percent of the corporation's stock is treated as a partner for other employee benefit purposes, such as group life and health plans.

Multiple Employer, Collectively Bargained, and Multiemployer Plans

In this text, if not stated otherwise, it is assumed that any qualified plans referred to are maintained by a single employer or by a group of related employers. It is possible, however, for more than one employer or related group to participate in a single qualified plan. If such a plan is established under a collective bargaining agreement (as is usually the case), it is referred to as a collectively bargained plan. With a collectively bargained plan, the plan is usually designed and maintained by a labor union, and employers who recognize the union as a bargaining agent for their employees agree to contribute to the plan on a basis specified in the collective bargaining agreement. If the plan is not the result of a collective bargaining agreement, it is referred to as a multiple employer plan. Such plans might, for example, be maintained by trade associations of employers in a certain line of business. There are special rules for applying the participation and other requirements to these plans.

There are also provisions for a special type of collectively bargained plan known as a multiemployer plan (Code Section 414(f)). A multiemployer plan is a plan to which more than one employer is required to contribute and that is maintained under a collective bargaining agreement covering more than one employer; the Department of Labor can also impose other requirements by regulation. Presumably, most large collectively bargained plans will qualify as multiemployer plans. Because of the nature of the multiemployer plan, the funding requirements are somewhat more favorable than for other plans. However, the employer may incur a special liability on withdrawing from the plan.