ROYALTIES

[Guest arlene]

Can royalties be used as compensation for a qualified plan?

[Belgarath]

Maybe. This is so dependent upon facts and circumstances... I'd STRONGLY recommend you take the specific circumstances to a CPA who is familiar with the issue. But, for example, an author probably can have earned income from royalties - see IRC 401©(2)©.

[Moe Howard]

Read the plan document of your specific plan. It will define "compensation"

[Belgarath]

While it is always good advice to read the document, (for example, the compensation definition might possibly EXCLUDE royalties) it may not help much here. If, for example, the person is self employed, the document definition usually refers to "earned income." The problem is for determining what constitutes the net earnings from self employment derived from the trade or business for which the personal services of the individual are a material income producing factor. Which gets you back to some potentially complex and difficult choices with regard to royalties and how they are classified.

[Moe Howard]

There is nothing difficult about it.

The plan document will define compensation.

There is no need to fret. Asking a CPA is useless, unless the CPA reads the definition of compensation in the plan document.

If the plan document defines compensation as "earned income" subject to SE tax, then asking a CPA to determine if the royalties are subject to SE tax would be a good idea.

Let's not make this hard. Just read the plan document.

[Kirk Maldonado]

I could be wrong, but doesn't the definition of compensation in the section 401(k) regulations preclude using royalties. Also, doesn't the section 414 definition of compensation cross-refer to the section 415 definition? (I've not checked any of these items, so please feel free to point out that I'm wrong if I'm having a "senior moment.")

[AndyH]

So the document might not have the currently correct and complete (like our pitching staff) answer? Imagine that , B.

[Guest mjb]

Q1 order for royalties to be comp wont they have to be subject SECA/FICA ?

Q2 will the inclusion of royalties be discrminatory if only HCEs have such income?

[Moe Howard]

mjb,

Q1 = Yes

Q2 = No