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Deduction on 1040 for a partner in a 401k plan


PamR
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I know the deduction limit for the employer part of a 401k plan is limited to 25% but does that 25% limit flow to the partners 1040?  I have a partner that maxed out at $57,000 plan does not go over the deductibility limit.  However, his accountant is doing his 1040 and he says he is limited to 20% of his SE income.  He made less than usual in 2020 so this is the first time I have seen this.  I always check for 25% at the plan level, but am I supposed to be checking this limit for each partner in a partnership as well?  Does anyone have any insight on this?

TIA

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PamR, we had a long discussion of this on BenefitsLink a couple of years ago. The IRS publication (Pub 560) suggests that a self-employed person, including a partner, must make an individual calculation, based on his/her individual SE income, in applying the Section 404 deduction limit to his or her individual 1040. See especially Chapter 6 of Pub. 560, beginning on page 24, which unfortunately for the purposes of resolving the argument uses examples that assume a sole proprietor with no employees. This is probably what the CPA is looking at. I think there is a basis for this position under the statute and regulations. There does not seem to be any specific guidance on point from the IRS, or any court case, that would settle the argument. A clear majority of the practitioners on BenefitsLink thought that the Section 404 deduction limikt is applied in the aggregate, i.e., the partnership on its 1065 just has to stay within 25% of the total of the wages paid on forms W-2 to employees, plus all the SE income to partners, mix and match, and then it allocates the aggregate deduction out to individual partners in accordance with the partnership agreement. There is a good argument for that position under the Code as well, I think.

This link should take you to the earlier discussion: 

 

 

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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