members of pllc deferred into new plan. will report no earned income.

[Lori H]

a new plan with 3 doctors will be showing no earned income and a substantial loss according to their cpa. up until it was determined that there would be no income, the 3 doctors were deferring into the plan and receiving a match. the match can be transferred into a suspense/holding account to be used later, i believe, but can the deferrals "unwind" back to the pllc before plan year end 12/31 or will that amount be required to be refunded as income? either way im pretty sure the tax consequence will be roughly the same. i am just trying to minimize paperwork at this point.

[Ron Snyder]

It is not quite clear in your post whether it is the Plan or the PLLC that will be reporting no earned income. Query: how did they defer income if they had none?

If the Drs. had no earned income, they cannot contribute, nor can there be a match. Does the plan document permit refunding undeducted employer contributions (look under "prohibition against reversions")? Such contributions could be considered as being made under a "mistake of fact", but such language would have to be in the doc. Moreover, I believe that a careful reading of such language would indicate that it applies to employer contributions, not employee contributions. I believe that the employee contributions should be considered as excess deferrals and refunded and reported next year as such.

[GBurns]

As vebaguru pointed out clarification is needed.

If the Drs had no income the Drs could not be deferring because deferrals are deducted from their income. However, it could have been that the deferrals were being made from what were really "Partnership Draws". Now that the LLC turns out to have a loss there is nothing to offset the "Draws" and the "Match" was not earned. You would have to do the reversal as previously stated.

However, the whole thing seems spurious anyhow. If any amount existed in the LLC that was available to be set aside in "a suspense/holding account " it means that there was revenue. Revenue being made available for this purpose would seem to indicate that there was a "profit"/earnings for the year. If there was "profit"/earnings for the year it had to be distributed to the partners. If there is a distribution to the partners, How can there be no income? Paying the Drs personal expense as being business expenses so as to be able to report no income, serves very little purpose in the overall scheme of things.

[Blinky the 3-eyed Fish]

It doesn't sound fishy at all to me. Matching contributions were made throughout the year, yet it turned out the business had no net income. It happens. I also think it's clear it's the PLLC with no net income, not the plan.

That being said, check the document for treatment of the match and deferrals under a 415 violation. Normal language is that the match will be held in suspense as you suggested. Normal language for the deferrals is that they will be refunded with earnings.

[Lori H]

the doctors were receiving a "paid draw", no earned income. its a start up pllc and just did not have the revenue in its first year to report earned income. this was not realised until they had deferred funds into the trust. plan doc is a prototype. language re 415 violation is similar to that blinky reported. thanks.