401 K Plan with S corp K-1 dollars.

[Guest GinGinR]

We have just converted from a SIMPLE retirement plan that ended in 2002 and have started a 401K plan for 2003. The owner of the company has a partner and we have an S-Corp. They are treated as employees and draw a paycheck, but they also take cash disbursements and receive K-1 forms at the end of the year on that income. Does anyone know if the 401K money that they want to defer MUST be run through payroll, or can they just take it out of their cash disbursement money which avoids FICA and unemployment taxes? Thanks for your help. One partner wants to defer the full 14,000.00 at this time.