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richard

Pension Plan based on W-2 income instead of K-1 profits

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Can K-1 income be the basis for a pension plan. If not, can K-1 income be converted into W-2 income, and therefore be the basis for a pension plan?

Currently, an LLC exists (call it A"). It has two limited liability members, B and C, which are each S-Corporations. Individual X is the sole owner of Corporations B and C.

"A" makes money by buying things and either selling them or renting them out. Currently, the net profit of A is shown on K-1's for B and C. The K-1 amounts are then transferred to X's 1040. My understanding is that these amounts cannot be used for a pension plan for Individual X.

However, Individual X performs services for "A" that enables A to show a profit. (X knows the customers, arranges the deals, etc.) X is currently not drawing any income from A, except via the K-1 distribution through B and C.

If X becomes an employee of A, then couldn't A set up a pension plan and cover X based on X's W-2 income paid by A? Now, this income would be subject to FICA (and FUTA, etc.), but other than that, it would seem that all other moneys would be taxable in the same manner to X. So, a pension plan would make sense if the value of the pension benefit for X (based on his W-2 income from A) would significantly exceed the FICA taxes that A (as the employer) and X (as the employee) would have to pay.

Is this analysis correct? Have I missed something?

(I assume that X does perform legitimate services for A and that any W-2 income could be justified. Clearly, the accountant involved would have to be comfortable with this.)

Would there be any rationale (or advantage or disadvantage) for X to be the employee of either B or C, instead of A? (I don't think there would be any advantage or disadvantage. In this situation, X owns B and C.)

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K-1 income can be used as compensation in pension plans, so there is no need (for pension purposes) to make it W-2 income.

The K-1 income is treated the same as Schedule C income for a sole proprietor in that the K-1 income (after contributions to the plan on behalf of r&f employees) is reduced by 1/2 FICA and then the remaining amount is split between plan compensation and plan contribution.

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