Unreimbursed Partner Expense impact on Partnership SEP Contributions

[John]

I hope I can find an answer to the following scenario:

A partnership establishes a SEP for the partners and the plan calls for the partnership to contribute the maximum allowable amount for each partner.  Partnership contributes 20% to each of the five partners.  However, each partner has differing unreimbursed partner expenses that may reduce the max contribution amount on an individual partner basis.  These UPE are not reported to the partnership.  I think that each partner is required to determine if they have excess contributions and remove those contributions and associated earnings from their account.  However, this can result in differing contribution rates for the individual partners so that one partner might end up with a 7% contribution rate and another maxes out his contribution at 20% because he had no UPEs.  Is it the responsibility of each individual partner to remove the excess contributions caused by the UPEs or is the partnership somehow responsible for recalculating the percent contribution based upon the individual partner UPES to determine the lowest percentage allowed that would equalize all the partners percentages.  It's a tough question for the partnership, but does occur fairly frequently.  I would appreciate any guidance from the group.

[Flyboyjohn]

Accounting for partner business expenses that reduce SE income on the partner's individual returns is a universal and "unadministratable" issue, particularly in large professional partnerships and in my experience is simply ignored and "hope for the best".

I've handled IRS audits of partnership plans and fortunately the auditors accepted the SE income on the K-1 and did not ask for partner 1040s.

A partial solution might be to switch to a qualified profit sharing plan with every participant in their own allocation group so that some partners could legally receive more than 25% of earned income and if you did encounter a smarter auditor you might have a chance of passing (a)(4) even with varying allocation rates.

 

[Bird]

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Partnership contributes 20% to each of the five partners.  However, each partner has differing unreimbursed partner expenses that may reduce the max contribution amount on an individual partner basis.  These UPE are not reported to the partnership.

I think the "answer" is that the partnership has to request that information in order to determine the contribution accurately.  As Flyboyjohn notes, that may be impractical or impossible.  I think I'd want to at least have it on record that I asked for it before doing any calcs. 

On 3/31/2017 at 10:44 PM, John said:

I think that each partner is required to determine if they have excess contributions and remove those contributions and associated earnings from their account.  However, this can result in differing contribution rates for the individual partners so that one partner might end up with a 7% contribution rate and another maxes out his contribution at 20% because he had no UPEs.

Mmm, I don't think this is solved by taking out the excess, but if it were solved that way, I think everyone would wind up with the same (net) contribution rate, so I'm not sure what you're saying here.

[John]

Mmm, I don't think this is solved by taking out the excess, but if it were solved that way, I think everyone would wind up with the same (net) contribution rate, so I'm not sure what you're saying here.
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The only way they end up with the same contribution rate is if each partner has the same UPEs which would be highly unlikely.