Luke Bailey

Based on your description, it would appear that all consists of previously taxed basis, so would be no tax when comes out.

Additionally, note that the PBGC's rules provide that if you fail to comply any of the Standard Termination Timeline milestones/requirements, you will generally have an ongoing plan, subject to their providing discretionary relief. See. PBGC reg. sec. 4041.31(e)(1).

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. Agreed, RatherBeGolfing.

Hmmh...All you need is 10% for (m)(2)(B). Anyway, good luck, Below Ground.

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? 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.

ASG is very fact-intensive and there are no longer any regs, even proposed, so hard to opine. You also need to know family and business relationships for stock attribution. Having said that, it seems to me that, depending on additional facts, Firm 1 could be performing historical employee services for 2 and 3, and the owners of 1 or HCEs of 2 and 3. 1 and 2 would be one m2b, 1 and 3 the other, and you might have a "combined group." But again, this is just a hypothetical analysis of a hypothetical situation, Would need more facts. The Code section is in effect, but again no regs. Good luck, Below Ground.

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.

Re C. B. Zeller's point, it's in 1.401(m)-2(a)(5)(iv).

My understanding is that the deadline is the 1040 deadline of the partner, i.e. 4/15. Also, my understanding was that if you file an extension, you have until the extended due date to make the contribution. I think I researched that once. The auditor may have been getting confused with when statute of limitations runs on return filed under extension, which is from date of filing, not last date could have been filed.

Would need at least that much comp in January, b/c of 100% of comp limit. BTW, if anyone questions the result provided by CuseFan, the cite is 1.415(j)-1(d)(3).

For a multiemployer plan with a joint board of trustees, that board is treated as plan sponsor and it should get (sounds like it has) and use that EIN. Below if from 5500 instructions, page 16: If the plan sponsor is a group of individuals, get a single EIN for the group. When you apply for the EIN, provide the name of the group, such as ‘‘Joint Board of Trustees of the Local 187 Machinists’ Retirement Plan.’’ (If filing Form SS-4, enter the group name on line 1.) Note. EINs for funds (trusts or custodial accounts) associated with plans (other than DFEs) are generally not required to be furnished on the Form 5500; the IRS will issue EINs for such funds for other reporting purposes. EINs may be obtained as explained above. Plan sponsors should use the trust EIN described above when opening a bank account o ing other transactions for a trust that require an EIN.

Bird, those are two possibilities. The third is that the IRS thinks that is the right way to do it. I can see arguments both ways. Maybe someone who has dealt with IRS at a high level on issue can weigh in. I think either approach would be justifiable under statute.

Of course, if you do a general test and the targeted allocation passes, you'd be OK. But at that point whether you do it based on balances or just because you like the person doesn't matter. Doing it based on balances is going to introduce an element of randomness.

OK. Here's another weird thing I just thought of about this, which shows how complex it is. Assuming you do get to use the aggregate method (i.e., employee comp and partner comp are aggregated and you can spread out to the partners, up to their individual contribution amounts, up to 25% of that total amount), you still have to calculate the partners and employees separately, because employees' "comp" number (basically, W-2 with 401(k), 125, and 132(f)(4) addbacks) does not include their nonelective and matching contributions by definition, while for partners you do have to calculate the nonelective and match that each gets and subtract those amounts from K-1 earnings, in a circular calculation, to get their "comp" for plan purposes (401(c)(2)(A)(v)). So you would need to first calculate all of the partners' individual contributions, add them up, and then reduce aggregate 401(c)(1) self-employment income for all partners, before the contributions, by the aggregate partner contributions, then add that number to the employee compensation number, and your overall deductible limit would be 25% of that resulting sum. Even putting aside that this would not be accurate because you would not have included individual partners' unreimbursed partnership expenses (which I think a lot of partnerships, but not all, blow off), I don't know anybody who does that. I think the folks responsible for the partnership's return and for calculating the partnership's retirement contributions and deduction just take the number for the W-2 employees on the 1065 and push the partner calculation out to the individual partners on the K-1 and leave it at that.

Seems to me like this is an (m)(2)(B) group.

Thanks, justanotheradmin. At this point, I have to say I'm an agnostic on this issue. Can see arguments both ways. But if the "aggregate" theory is correct, boy does the IRS need to explain that and change Pub 560 to include situations with multiple owners. This is really complicated. Perhaps an example will point out the importance of issue. Suppose you had a partnership with two partners and total W-2 compensation of $1 million, and the partnership contributes $100,000 to a profit sharing plan (no 401(k)) for the employees. The partnership also contributes $50,000 for each partner. Assume that the year is not very profitable, and that without the deductions for their own contributions, the partners each have only $50,000 in SE income. Can they each deduct 100% of the contribution for them (because it is not in excess of their SE income and 25% of total compensation is .25 * [$1,100,000 - $100,000], or $250,000, so that the $100,000 for the employees plus the $100,000 for the partners is still within 25% of total compenation), or just $10,000 apiece (25% of [$50,000 - $10,000])? Pub 560, I think, would say the latter, but maybe it is the full $100,000. I don't see anything yet that definitively says one way or other. For what it's worth, the following from IRS website seems to assume that each individual partner has a separate calculation. However, it is not definitive both because not regs and also may just be repeating the mistake in Pub 560. I mention it primarily because it seems to confirm IRS's belief that the Pub 560 calculation is applicable to partners. To see in context, go to https://www.irs.gov/retirement-plans/retirement-plan-faqs-regarding-contributions-what-is-a-partners-compensation-for-retirement-plan-purposes. Finally, the below doesn't directly mention the 404(a)(3) 25% of compensation deduction limitation, although it does so indirectly by referring to the calculation in Pub 560. But you could interpret the below as describing how the partnership should calculate the individual partner's contributions for 415(c) and 401(a)(4) purposes, but not limiting the partner's deduction to 25%/20% of the individually calculated amount. What is a partner’s “compensation” for retirement plan purposes? A partnership makes annual contributions to a partner’s retirement plan account based on her net earned income. Net earned income For a partner, this is calculated in the same way as for most other self-employed plan participants by starting with the partner’s earned income and then subtracting: plan contributions for the partner, and half of her self-employment tax. Publication 560 has tables and worksheets to calculate the deduction for contributions to a qualified plan for a partner. Partner’s earned income A partner’s earned income is the income she receives for her services to materially help produce that income (see Internal Revenue Code sections 1402 and 401(c)(2).) A partner must separately calculate her earned income for each trade or business. Not every partner may have earned income (for example, a limited partner who does not provide services to the partnership and is merely an investor). Also, all of a partner’s income from the partnership may not be earned income (for example, investment income that is passed through the partnership to the partners). Additional Resources: Publication 541, Partnerships Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)

And if you allocate on balances (which are likely to be bigger for folks with higher compensation), you could very likely have a 401(a)(4) violation.

duckthing, the analysis in the EOB (which I don't have, so cannot consult, and appreciate your posting)could be correct, but to the extent it cites nothing but the statute, I can't conclude it is definitely correct. The EOB analysis glosses over the "of such individual" clause in 404(a)(8)(E), and assumes it is not intended to be taken literally, just as a sloppy way of saying that the self-employment income of the partners (in the aggregate) is to be lumped in with the employees' W-2 comp as "compensation." But Congress could have referred to self-employed individuals, plural, in 404(a)(8)(E), and they didn't. It is possible to interpret that as unintentional, but you can also interpret it as intended to treat each individual partner separately, and that interpretation seems consistent (although not unambiguously so) with Pub. 560. Boy do I wish I had Derrin Watson's Powerpoints on this.

LIke justanotheradmin, I don't recall (although have not checked) there being a different rule for partners in partnerships than for W-2 employees. I guess the question arises because, since the K-1's are not due until 4/15, there would be a temptation to just treat the excess as a reduced contribution, which from the point of view of the partner's 1040 and and K-1, would be doable. But it seems to me that if the partner did elect (as required) by last day of plan year to contribute a certain amount, and that amount went into the plan and is now being distributed (after 3/15), it would have to be treated like any other excess contribution. Query what would happen if, however, the contribution had not yet actually been made (since the partner generally has until 4/15 to make it)? In that case, it would seem there is no distribution of excess contribution, so excise tax at least arguably would not apply, although I'm not sure how IRS would feel. But again, have not researched. If your plan had a provision permitting the plan administrator to reduce contributions as it seems fit in uniform and nondiscriminatory manner, maybe this would fit that and you would be OK if money had not actually gone in and was not being returned.

Thanks, card. I'm finding there is surprisingly little that explains this, at least from IRS. I recall that Derrin Watson did a 90-minute webinar on the issue, maybe 6 or 7 years ago, but cannot find it on internet and won't even begin to search my office. I don't recall what his position was on it, though I'm sure it was correct. The statutory basis for the position I originally advanced is 404(a)(8)(D), which says that for a self-employed person (which would include both sole proprietors and partners), you treat all references to "compensation" (which would seem clearly by its terms to include the 25% of "compensation" limit of 404(a)(3)(A)(I)(I)) as being references to "the earned income of such individual derived from the trade or business [of the plan sponsor]." Close to unambiguous, but maybe not completely unambiguous. I am having difficulty marshaling support one way or the other from the regs, and would note (a) that the regs are out of date, and (b) they (and 404(a)(8)(C)) provide that the amount does not fail 162 or 212 as long as not in excess of all earned income, but that's not conclusive for the 25% of compensation limit of 404(a)(3). Treating each partner individually seems clearly implied by Pub 560, unless you assume that Pub 560 assumes only a sole proprietor and the IRS just didn't think to tell us in Pub 560 that if we're dealing with a partnership the 25% rule is applied to all of the partners as a group. I'm also having trouble figuring out how anything other than an individual calculation would work mechanically in terms of the partner's return preparation. The preparer who does the Firm's 1065 deducts the plan contributions for the W-2 employees on the 1065, and that deduction reduces all the partners' gross income from the partnership's trade or business as reported on each individual partner's K-1. Then you get your K-1, and it does not have on it a deduction for your own contribution. You have to take your deduction on line 28 of Schedule 1 for 2018. (Before 2018, was just line 28 of the 1040, but now on a separate schedule due to "simplification.") But I've never seen the preparer of the 1065 and K-1's tell you that they ran the 25% deductibility test on the aggregate of all the partners and you're contributions are OK, or not, globally. Frankly, they really don't know your earned income, because as I mentioned yesterday, some partners may take an additional deduction on schedule E for unreimbursed partnership expenses. I believe the preparers' software tests at the individual level. (Hence, I guess, the original questioner's disagreement with CPA, although not proof of who's right, of course.)

Belgarath and RatherBeGolfing, thanks.

Bird, what? Other opinions? :) Read footnote 1 in the table you excerpted and then follow to the "Deduction for Self-Employed Individuals" discussion in the right-hand column on page 15. But of course, the more crucial cites are to the Code itself (404(a)(8)(C)) and regs (Temp. reg. 1.404(e)-1(A)).

OK. Another variant of your question, Pammies57. If both companies have adopted the plan and the individuals have time and comp from each company, then either company may (depending on plan terms) be able to determine contributions. Since (you tell us) this is a controlled group, you have only one 415(c) limit per individual.

No. Each partner's deduction for his or her own contribution is determined individually, and cannot exceed 25% of his or self-employment income on K-1, minus 1/2 SE tax, and minus the contribution itself, resulting in a circular calculation. See IRC sec. 404(a)(8)(C) and Temp. reg. 1.404(e)-1(A). You deduct the contributions for employees on the 1065, and that is shared by the partners in the same percentages as they share general business expenses. Then you have to calculate each partner's deductible amount separately. (Each partner will have an individually allocated contribution amount, typically, if, e.g., cross-testing is used to determine contributions.) Again, the deductible contribution for each individual partner is limited to 25% of his/her SE income, as reduced by half of his/her SECA tax, minus the contribution itself that is being deducted. You can use algebra (or Excel) to calculate x = .25 * (SE income - x), but the description of the calculation in Pub 560 is basically correct, since 25% is 20% of 125%. P.S. Don't forget to check whether each individual partner took a deduction for unreimbursed partnership expenses on Schedule E, since that reduces his/her SE income.

Pammies57, we need more information. Are they in a controlled group? Brother-sister, parent-sub? Are you sure both entities have 415(c) income payments, and have both adopted plan? Usually where multiple employers (whether in a controlled group or not) adopt the same plan the plan document will provide that each employer funds the contributions attributable to the credited service and compensation of its employees. Most likely any other provision would, as Flyboyjohn points out, not meet the IRC 162 "ordinary and necessary" test. However, if each company had enough comp paid to the individuals, one could declare a higher contribution rate, or the other might declare no contribution rate at all, for a discretionary profit sharing contribution.