2 Partnerships - Earned Income

[TBob]

I have a small medical group consisting of 3 doctors and their staff. The three doctors are equal partners. The partnership sponsors a Safe Harbor 401(k) Plan using the SH Match and a SS Integrated Profit Sharing Allocation. We are obtaining K-1 information from this partnership to calculate the earned income for the doctors.

We have just discovered that the doctors all own equal shares (33.3%) of another partnership. The second partnership owns the building that their practice is in. The doctors each receive additional k-1 income from this partnership from the rental of the space in the building.

The question at hand is...can the doctors include their compensation from the second partnership for plan allocation purposes. My thinking is that this is a control group so they could use their compensation from the second partnership if that partnership signed on as a participating employer to the plan sponsored by partnership #1.

Your Thoughts...what am I missing?

[Locust]

Contributions to a qualified plan for partners must be based on "earned income" - essentially income earned from the performance of services. Rental income would not be earned income.

[namealreadyinuse]

Do they really need more comp? Aren't they at $220,000 already?? Usually the problem is additional employees (NHCEs) at the newly discovered partnership, but that doesn't sound like an issue here.

[TBob]

Name...Yes, one of the doctors needs more compensation. The other two doctors make well more than the compensation limit but the third doctor does not. Ideally, he would like to include the compensation from the second partnership to bring him up to the comp limit so he can receive the same contribution as his partners.

Locust...I don't disagree with you regarding the "earned income" not actually being earned when it is coming from rental revenue. However, I am wondering if there is a distinction made on the k-1 between these types of income. I am not a tax expert in any way so I am looking for any helpful information here. In all of the partnerships that sponsor plans that I have been involved with, we simply took the Partnership income from the k-1 and, after adjustments, used it for plan purposes. I have never looked at the K-1 to determine where the income was derived.

[Guest CharlieLaur]

Are the partners including the income from the second partnership in the income that is "transferred" to the Schedule SE (Form 1040)? On what line on the K-1 is the income being reported by the second partnership?

[Stevo-PDX]

Wouldn't income from the rental of property be investment income and not earned income? I don't think that you can include that income just because it's reported on a K-1.

See this link, page 4 definition of Earned Income

Retirement Plans for Small Businesses