N. Wood

Mike Preston: thank you. Do you think the language quoted above from their E-trade plan is provides for individual allocation groups? It seems more like like a straight-forward pro rata based on compensation. Bird: I believe they are trying to minimize one partner's income (they are married but filing separately for legitimate reasons). At the same time, they want to ensure that "profit" that does not hit the tax return, like the partnership's contribution to retirement plan, are split evenly. Unfortunately, minimizing one also affects the other because of 415 limitation. Both of them max out 401(k) elective contributions through other employers. If you have some creative suggestions, please let me know.

I agree with you on the 415 problem. So it sounds like the recommendation would be to continue 401k based on compensation as currently written in the plan (aka, "stop with the crazy," with credit to Mr. Preston). Or, if the clients insist on 50/50 split, re-write the 401k plan with the language to reflect that, but with a modifier "not to exceed 415 contribution limits."

Mr. Preston, I am an attorney and a CPA with more than a decade of practice. And when I say 50/50 split of the employer contribution, I mean exactly that, not pro-rata based on compensation. I posted here because I observed depth of expertise on this forum from reading the threads. All I am getting from you, however, is "skepticism." Do you actually have a citation to some reg that prevents clients from setting up their partnership and 401(k) plan in this matter, or would you like to insult me some more?

No, we are not talking about optional plan contributions - if you mean employEE's elective contributions. We are talking about employER (partnership's) contributions to 401k, which is limited to 20% of the partnership's income ("profitshare"). They would like those split 50/50, while the ownership interest and the income in the partnership is allocated 10/90 ("profits") per operating agreement. See original post. I am wondering what is prompting the skepticism?... Especially for husband and wife?...

Adopting a new plan or even switching to a new provider is not a problem (and it looks like that's what needs to happen). I am wondering if there will be an issue with changing profit sharing allocation not tracking distributive formula.

No, this is for 2016 and beyond. The Adoption Agreement merely references Plan Description (see post above). Plan Description is less than helpful.

It's a standard E-Trade solo401k plan, available here: https://content.etrade.com/etrade/estation/pdf/401kPlanDescriptionBooklet.pdf E-trade Plan Adoption agreement says "Employer Profit Sharing Contributions Employer Profit Sharing Contributions, if any, will be allocated to all Qualifying Participants pursuant to the pro rata allocation formula described in Plan Section 3.04(B)(1)." Plan description section 3.04(B)(1) says "Unless otherwise elected in the Adoption Agreement, Employer Profit Sharing Contributions will be allocated to all Qualifying Participants using a pro rata allocation formula. Under the pro rata allocation formula, Employer Profit Sharing Contributions will be allocated to the Individual Accounts of Qualifying Participants in the ratio that each Qualifying Participant’s Compensation for the Plan Year bears to the total Compensation of all Qualifying Participants for the Plan Year. The Employer Contribution for any Plan Year will be deemed allocated to each Participant’s Individual Account as of the last day of that Plan Year. Notwithstanding the preceding, Employer Profit Sharing Contributions and Employer Money Purchase Pension Contributions will be allocated to the Plan on behalf of each Participant who has incurred a Disability and who is a non-Highly Compensated Employee if so specified in the Adoption Agreement and without regard to any allocation conditions" Since compensation for partners is net income minus self-employment tax, that seems to suggest contribution in the 10/90 ration? What if the plan document is amended and says compensation is 50/50 for co-owners (or in "equal share")?

Nothing. But since this is a solo401k, it can be amended at any time.

Situation: husband and wife are co-owners of an LLC taxed as a partnership. They take draws, not W2s, and there are no other employees. LLC Operating Agreement splits income 10/90 between the two. They set up solo401k. Question: if the partnership contributes 20% of its profits to 401k, does it split up the contribution between the partners 50/50 (if that's what in operating agreement) or 10/90 according to the partnership share? Is there a problem if income is shared 10/90 but partnership contribution to 401k is split 50/50?