Partnership 401(k) Plan

[Guest PBJ]

I am so confused: Partnership maintains a 401(k) plan. The partners make 401(k) contributions, receive a matching contribution, and a profit-sharing contribution. There are also non-partner employees in the plan. The non-partners make 401(k) deferrals, receive a matching contribution, and receive a profit sharing plan. It came to light that non-partners may be funding their own profit sharing contribution. In other words, nonpartner was told that he would make $50,000 a year in compensation. But that $2,500 would come out immediately and placed in his profit sharing contribution account. His compensation will then be $50,000-$2,500. And, from that he can elect to make 401(k) deferrals if he wished.

This has to be wrong, right?

Also, can this scenario work for partners: partner is told that he will make $100,000 per year, but that $X will come out and he will only see $100,000 - $X in his paychecks. ??

I am confused so any help would be greatly appreciated.

thank you!!

[Jim Chad]

Let's look at just the part where you said the employee was told he would make $50,000 and $2,500 was gong to be put in his retirement plan. ( I changed the wording a little. Does this still say what you want it to?)

This does not sound like an elective deferral. It sounds like the employee has no choice. So it is a nonelective contribution. And it is part of the compensation package. Certainly it is part of the labor costs to the employer. But his compensation on his w-2 and for our purposes is not $50,000. It is $47,500.

For years, I have had a Plan where the owner gives his one employee a $2,000 profit sharing contribution. Every year I have to figure out what the owner gets to match the document and the $2,000 for the employee. By the way this is not as hard as it sounds.

As far as this working for a partner: It sounds like the normal situation for me. An owner decides how much of an employer contribution he sis going to make and how much he will receive in cash. Of course how much goes to who must follow the terms of the document.

[Kimberly S]

Where it differs for a partner is that their compensation is determined when the tax return is filed, not in advance. They may take a "draw" of that $100,000 that you mentioned, but if the business has a net loss for the year their compensation for plan purposes is zero.