The partnership sponsors the plan
For retirement plans, a partner is not their own employer. The partnership is treated as the employer of each partner, so the partnership adopts the plan. A partner cannot set up a separate plan of their own for income from the partnership.
A plan that covers only partners, and their spouses, stays outside Title I of ERISA, the same as a plan for a sole proprietor. The Department of Labor's regulation says a partner and their spouse are not employees of the partnership for this purpose, with no minimum ownership share. Once a common-law employee joins the plan, that changes.
An LLC with two or more members is taxed as a partnership unless it elects otherwise, so everything here applies to it. An LLC owned only by a married couple in a community property state may instead be treated as disregarded; see sole proprietors and single-member LLCs.
Each partner's pay
Each partner's plan pay is their earned income from the partnership, worked out the same way as a sole proprietor's:
- Start with the partner's net earnings from self-employment, shown on Schedule K-1.
- A general partner subtracts partnership expenses they paid personally and were not reimbursed for, and certain deductions claimed at the partner level.
- Subtract the deduction for half of self-employment tax.
- Subtract the partner's own plan contributions, which makes the calculation circular.
The result is capped at $360,000 for 2026.
Guaranteed payments, the fixed amounts some partners are paid for their work regardless of profit, are part of self-employment earnings. But plan pay is the partner's total earned income from the partnership, not the guaranteed payment alone.
Limited partners have self-employment earnings only from guaranteed payments for services, so a share of profit alone gives them nothing the plan can count. Whether members of an LLC who are active in the business can be treated as limited partners for this purpose is unsettled.
Where the deduction goes
Contributions for partners are reported to each partner on their Schedule K-1, and each partner deducts their own on Schedule 1 of Form 1040. Like a sole proprietor's, the deduction reduces income tax but not self-employment tax, and it cannot exceed that partner's earned income.
The partnership's return is due in March, or in September with an extension. The contribution for 2026 has to be made by the return's due date to be deducted for 2026: September 15, 2027 if the partnership extends. See cash balance plan deadlines.
Different benefits for different partners
A cash balance plan can give each partner a different pay credit. An older partner close to retirement can have a large one, and a younger partner a smaller one. That flexibility is one of the reasons partnerships use cash balance plans.
It has limits. Under IRC 401(a)(26), a defined benefit plan has to give a meaningful benefit to at least 40% of the people who could be in it, rounded up, and never fewer than two. Partners count, so a partner who wants nothing cannot always simply be left out.
| Partners | Minimum who must benefit |
|---|---|
| 2 | 2 |
| 3 | 2 |
| 4 | 2 |
| 5 | 2 |
| 6 | 3 |
IRS guidance treats very small accruals, below about 0.5% of pay a year, as potentially not meaningful. So in a two-partner firm, both partners need a real benefit. In a firm of five, two do. Where a partner earns much less than the others, nondiscrimination testing may also come into play. Each of these needs to be built into the plan design, which is work for the actuary.
Who pays for each partner's benefit
The partnership makes one contribution to one plan, but the actuary can work out how much of it funds each partner's benefit. Partners usually want the cost of a benefit to fall on the partner who receives it, so that a partner putting away a large amount is not doing it partly with the others' money.
Getting that result depends on how the partnership agreement allocates the contribution and the deduction among the partners, and on how the plan is designed. It is not automatic. It is something to set up with the partnership's tax adviser, and ideally a lawyer, before the plan is adopted.
Other questions a multi-partner plan raises
- Small partners. The government's pension insurance program does not cover a plan that exists only for substantial owners, meaning partners with more than 10% of capital or profits. A partner with 10% or less may change that analysis, and with it the plan's premiums and deduction rules.
- Partners who own through a company. When a partner holds their interest through their own professional corporation, the partnership and that corporation may be treated as one employer. If either has employees, the plan may not be a solo plan at all. See who can have a solo cash balance plan.
- Existing plans. If the partnership already has a 401(k), its profit-sharing contributions are generally held to 6% of the partners' pay in years the cash balance plan is funded. See using a cash balance plan with a Solo 401(k).
- Filing. A plan covering only partners and their spouses files Form 5500-EZ once assets pass $250,000, the same as a one-owner plan.
What this means in practice
A partnership of two, where both partners want a plan and agree on how it is funded and invested, is close to the one-owner case. The rules are the same; there are two accounts to design instead of one.
Larger partnerships, or ones where the partners want very different things, need more care. Maxed treats a partnership with more than one partner as a case for individual review, and the estimate on this site is for one partner at a time. The calculator will give each partner a sense of their own range, using their share of self-employment earnings.