Must a partner draw a salary and receive a W-2 to participate in a 401k plan?

[Guest longterminvestor]

We are a small company with 7 total people. The partners have not historically drawn a salary and would like to participate in our safe harbor 401k plan. Can they do this without drawing a salary and getting a W-2?

[Guest Sieve]

Yes. See Treas. Reg. Section 1.401(k)-1(a)(6), at p. 399 here: http://www.irs.gov/pub/irs-irbs/irb05-05.pdf

[Guest longterminvestor]

Thank you very helpful. Anything I should document for internal records? For avoidance of doubt, we have profits in excess of the contribution. I appears as though the contribution will show up on line 28 of the partners form 1040. Where does this amount show up on the form K-1? Is the amount considered a guaranteed payment? Sorry for getting technical.

[rcline46]

Your TPA or CPA should be able to answer your questions. If you don't have a TPA, get one. No company should handle a qualifed plan on its own, there are too many traps. And if your CPA does not know how to handle partnership income in a plan (see 'Earned Income' for crying out loud) get a new CPA. Same goes for the TPA - if you have one and they can't answer your questions, fire them.

And who is making sure your document is up to date with all amendments?

[Guest longterminvestor]

Your TPA or CPA should be able to answer your questions. If you don't have a TPA, get one. No company should handle a qualifed plan on its own, there are too many traps. And if your CPA does not know how to handle partnership income in a plan (see 'Earned Income' for crying out loud) get a new CPA. Same goes for the TPA - if you have one and they can't answer your questions, fire them.

And who is making sure your document is up to date with all amendments?

We use a third party benefits provider to maintain our documentation and amendments. I am not concerned about the documentation on the plan. I am trying to understand how the information will be reported to the partners, what the correct process is and what I should watch for as our paid prepares / administrator generate reports and give us advice. I believe in doing things right up front and not fixing them after the fact.

Thank you for your replies, very helpful.

[david rigby]

Yes. See Treas. Reg. Section 1.401(k)-1(a)(6), at p. 399 here: http://www.irs.gov/pub/irs-irbs/irb05-05.pdf

Minor point: the question in the title and the question in the original post are opposites.

[Guest Sieve]

Actually, that's probably more than a minor point. Lest anyone be confused, the answer to the question in the body of the OP is Yes, and to the title of the post it's No.

[Guest L337pwner5]

Thank you very helpful. Anything I should document for internal records? For avoidance of doubt, we have profits in excess of the contribution. I appears as though the contribution will show up on line 28 of the partners form 1040. Where does this amount show up on the form K-1? Is the amount considered a guaranteed payment? Sorry for getting technical.

The 401(k) contribution would only be a guaranteed payment if it were a deferral from a guaranteed payment, I believe. There's no requirement to have guaranteed payments if a partner wants to contribute to a plan based on his or her "earned income." But to second the consensus of the other posters: benefits administration is tricky; pass-through taxation is really hard. Leave the K-1's to a CPA with some experience with partnerships.