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Schedule K-1 for 401(k) Plan Participant


SycamoreFan

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A 401(k) plan sponsor client just received a few Schedule K-1s for participants in the client's 401(k) plan. The partner listed on the K-1 is the trustee of the 401(k) Plan. The Schedule K-1's were generated by investment alternatives under the client's self-directed brokerage window. No unrelated business taxable income is reported on the K-1.

I wouldn't have expected to have these generated for a tax-qualified 401(k) plan, am I missing something? Should the client do anything with them? I was thinking of reaching out to the fund that generated them and ask why they were generated.

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Qualified plans and IRAs are subject to paying UBIT if the UBTI exceeds $1000 per investment fund. UBTI can occur in certain types of alternative investments such as master limited partnerships and mortgage reits. UBIT is paid by the plan by filing form 990. See IRS pub 598 P2. Risk of having to pay UBIT is one reason self directed 401k plans do not permit participants to invest in funds that generate UBTI.

Investment Limited partnerships that issue K1 are required to distribute the forms to all limited partners who have an investment in the fund. I have received several k1 for my individual accounts, none of which are retirement plans. Why do you think qualified plans are exempt from UBIT?

mjb

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Thank you. I agree that a qualified plan would need to do all the things you mentioned if UBTI was on the K-1. In this instance, no UBTI was flagged on the K-1's, just the partners allocation of income and expenses. I guess I figured a K-1 without UBTI would be suppressed for a qualified plan in the same way a 1099 is.

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not exactly. MLP is required to send k-1 to all limited partners and report all items of income including negative income in box 1 which is passive activity loss . PAL is accumulated each year in investors account and is used to reduce ordinary income subject to ubit. Its complicated. Very few investors understand the complexities of taxation of MLPs especially when the MLP is held in a retirement plan.

mjb

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  • 1 month later...

I'm in a similar boat as Sycamore Fan and so hoping Bird or others might elaborate or respond further on this issue. I'd like to throw the K-1 in the trash in our case but it relates to a publicly traded partnership held in a self-directed brokerage account. I think we'll revise our restrictions to prohibit such investments in self-directed accounts going forward but for now I'm concerned about what needs to be done in the case of significant UBTI. Is there some basis for being able to toss the K-1s in the trash? Thanks.

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IF you are going to allow investments that can throw off UBTI you are going to have to contend with the prospect of having to file a 990-T and pay the UBTI if the plan's total UBTI is above the filing threshold ($1,000, I think). If a tax is owed and its attributable to two or more participants there needs to be a fair allocation of the tax liability to those participants' accounts.

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Thanks very much. So, just to be sure I'm understanding IRS Pub 598 and the 990-T instructions correctly, it appears the $1,000 threshold is on unrelated taxable income in the aggregate so a plan would need to gather / track all the individual K-1s it receives and determine whether the total takes the plan over the threshold? In other words, it doesn't have to be $1,000 or more from the same investment fund or $1,000 or more in one participant's account?

Interestingly, the 2014 Instructions to Form 990-T seem to leave out trustees of trusts for 401(a) plans in the list of trustees subject to the rule; however, other portions of the instructions as well as Pub 598 seem to make clear that such trustees are subject to the 990-T filing requirements if the threshold is met.

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UBIT in a 401k plan that has multiple participants is very complicated and should be avoided because of the risk of UBIT and the administrative/tax preparation cost that will be charged to the plan. I don't know if the plan can allocate the additional costs to the participants who invested in MLPs. Plans should prohibit investment in any assets which generates a K-1 which could include a REIT invested in mortgages.

Pub 598 P3 requires filing of a 990-T when the plan's UBT gross income is $1,000 or more which indicates that the $1000 is the total of all unrelated business income received by the plan. P 21 of the 990-T instructions states that the 990-T filed by a trust must be signed by the individual fiduciary or by the authorized officer of the trust receiving or having custody of the assets or control and management of the income of the trust. The 990-T can be signed by the plan's trustee. It is not unusual for MLPs to delay issuing K-1s until after April 15 or revising a K-1. 990-T preparation involves many tax and income questions such as depreciation recapture and passive activity losses of each participants MLP interest and even net operating losses which is why a tax professional such as a CPA should prepare the returns. Since the 990-T filing is due today plan may want to file for an extension and pay some amount of estimated taxes.

mjb

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Thanks. In our current case the UBTI so far is limited to one participant and is very small and this is the first year we've received K-1s at all so I think we should be able to hopefully tighten up on the self directed brokerage investments going forward. With any luck, we'll be able to switch before we exceed the $1,000 threshold. I have not researched whether it is possible to allocate UBIT among participants--was really just basing that off of jpod's comments as he's usually an invaluably correct source of advice on these boards. Thanks again.

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Why not just tell the plan to not allow investments in MLPS and Reits that generate k-1s. No reason for participant to invest in an asset that loses all of its tax efficiency if it is held in a tax deferred retirement plan. Participants can invest in ETFs or Corps such as KMI that provide MLP investment that pay qualified dividends.

mjb

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