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Partners in 401(k) Plan and Maximum Contribution allowed


Alex Daisy
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4 hours ago, Luke Bailey said:

I have to say that I'm still agnostic. While you demonstrate that the EOB goes into significant and plausible detail, proving that it does not simply miss the issue, the only authority cited (Treas. Reg. §1.404(e)-1A(f)(1)) doesn't seem to prove or disprove the point. As previously stated, I think an argument can be made that the approach taken by the IRS in Pub 560 is supported by IRC sec. 404(a)(8)(D)'s use of the phrase "earned income of such individual." I think the IRS should clear this up in a Rev. Rul. Probably would not require a regulation.

I can see the merit of both arguments, but I don't think you can prove or disprove either argument based on the sources in this discussion.  I have sat through many presentations and the like on  earned income and contributions, and I can't remember any of them arguing for the limited position.  

I did find some old IRS EP training material on deductions that is somewhat interesting. 

Full Document

The relevant section can be found on page 29.  

In example 2, the reference to the allocation is simply "according to the plans allocation formula".  I would expect some kind of caution or mention of limiting the allocation to the sole proprietor if that was the position of the IRS.  

 

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5 hours ago, Luke Bailey said:

I have to say that I'm still agnostic. 

You  are ignoring the specific opinion of someone who goes out of his way to recognize alternatives based on the existence of any reasonable position. He does not, in this case. It would take a lot to cause my opinion to be different from the EOB. 

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15 hours ago, RatherBeGolfing said:

In example 2, the reference to the allocation is simply "according to the plans allocation formula".  I would expect some kind of caution or mention of limiting the allocation to the sole proprietor if that was the position of the IRS.

RatherBeGolfing, I agree with you that the second example supports the aggregate position, and I'm glad you found these IRS training materials. I had recalled these in hard copy (they're from the early '90's, right?) and looked for them the other day on internet but didn't find readily and gave up. Let me know if you disagree, but these are inconsistent with the explanation in Pub 560, right?

 

13 hours ago, Mike Preston said:

You  are ignoring the specific opinion of someone who goes out of his way to recognize alternatives based on the existence of any reasonable position. He does not, in this case. It would take a lot to cause my opinion to be different from the EOB. 

Agnostic: Noncommittal, undogmatic (Merriam Webster)

Mike, the only reason I dug into this was because I heard from a CPA that his tax prep software (from a major provider) was in conflict with what TPA was telling him for deductible amount for a partner in a partnership, and when I tried to explain to him that his software was wrong, I concluded I could not prove it, because Pub 560 was against me, the Code was ambiguous, and there did not seem to be a regulation on point.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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11 minutes ago, Luke Bailey said:

RatherBeGolfing, I agree with you that the second example supports the aggregate position, and I'm glad you found these IRS training materials. I had recalled these in hard copy (they're from the early '90's, right?) and looked for them the other day on internet but didn't find readily and gave up. Let me know if you disagree, but these are inconsistent with the explanation in Pub 560, right?

Id say early 2000's since it talks about what is new since EGTRRA became effective.  Some of the examples use the 25% and this one uses the 15% so it was probably an old example that wasn't updated.  

They are inconsistent, but Pub 560 also feels incomplete.  It talks about all employees in one section, and then completely ignores other employees in the next.  There should be some kind of mention or caution in this section regarding what happens to those other employees.  

With all the plan audits out there, I would think that there would be more discussion about this if it really was that controversial.   

 

 

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3 hours ago, RatherBeGolfing said:

With all the plan audits out there, I would think that there would be more discussion about this if it really was that controversial.

Not sure. I think for those who use aggregate method, it is seldom questioned, and if is, may get by the agent who doesn't send up for tech advice. It is my hunch/understanding (and I could be wrong) that a lot of partners have their deductions for 1040 calculated by CPAs using software that follows the individual/Pub 560 method, and of course that is not questioned either.

But maybe even more telling than exams, RatherBeGolfing, and in support of your position, is that if the IRS had determined internally, without equivocation, that the individual method described in Pub 560 was what Code required, the Service Center ought to be able to run a check on individual partner returns to see if deduction exceeds 25% of individual's earned income, and since they don't seem to be doing that, maybe can conclude that IRS is on board with aggregate approach notwithstanding Pub 560's seeming not to be. That makes a lot of sense, but difficult to know for sure that not an oversight.

 

3 hours ago, RatherBeGolfing said:

They are inconsistent, but Pub 560 also feels incomplete.  It talks about all employees in one section, and then completely ignores other employees in the next.  There should be some kind of mention or caution in this section regarding what happens to those other employees.  

Agreed, RatherBeGolfing.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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1 hour ago, Luke Bailey said:

It is my hunch/understanding (and I could be wrong) that a lot of partners have their deductions for 1040 calculated by CPAs using software that follows the individual/Pub 560 method, and of course that is not questioned either.

I think this is rare unless the CPA is also doing the qualified plan.  Its usually a back and forth between the CPA and the person doing the benefit calculation. They lean on us pretty heavily when the partners and sole props are pushing for their returns.  Some CPAs are more in tune than others and know what we need each year, while we have to drag it out of others line by line.  Far too many accountants/CPAs don't even have a firm grasp of what compensation can actually be used for plan purposes to begin with, which is scary enough on its own.  

 

 

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14 hours ago, Luke Bailey said:

But maybe even more telling than exams, RatherBeGolfing, and in support of your position, is that if the IRS had determined internally, without equivocation, that the individual method described in Pub 560 was what Code required, the Service Center ought to be able to run a check on individual partner returns to see if deduction exceeds 25% of individual's earned income, and since they don't seem to be doing that, maybe can conclude that IRS is on board with aggregate approach notwithstanding Pub 560's seeming not to be. That makes a lot of sense, but difficult to know for sure that not an oversight.

I'm not sure that's evidence of a position one way or the other, but I say give them credit for not checking it.  In any event they'd flag a lot of DB plans unnecessarily.  

(But I have to believe there is a mother lode of bad deductions for partners taking SEP deductions as if they were the only person in the plan, etc.  Or maybe it's chicken feed, I don't know.)

Sorry for extending this thread any longer!

Ed Snyder

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On ‎4‎/‎16‎/‎2019 at 8:03 AM, Bird said:

I'm not sure that's evidence of a position one way or the other, but I say give them credit for not checking it.  In any event they'd flag a lot of DB plans unnecessarily.  

(But I have to believe there is a mother lode of bad deductions for partners taking SEP deductions as if they were the only person in the plan, etc.  Or maybe it's chicken feed, I don't know.)

Sorry for extending this thread any longer!

Bird, good point re DB plans. May be why they don't check.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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