W-2 comp and k-1 comp

[Lori H]

an employee received w-2 earnings for 6 months of a plan year then became a member and received a K-1 for the remainder of the plan year. My concern is only how to determine K-1 earnings for plan purposes. If she had $151,541 of SE earnings (line14(a) of K-1) and you deduct $3,554 as Section 179 deductions(Line 12 of k-1), would that amount ($147,987) be what you use towards 415 limit of $245,000?

The plan defines comp as w-2 wages with the only adjustment being the exclusion of comp while not a participant.

[austin3515]

Earned Income is basically K-1 Box 14A net of 179. Reduce that by the employee cost (unless already deducted in arriving at 14A). We'll call this "Gross". Multiple that by .9235 and mu.tiple by that by 1.45%. Will call this Medicare Deduction. Now, take the SSWB, and subtract whatever W-2 income he had. If he had more than 106800 of W-2 income, you're done, no SS deduction. If he had, say, $50,000 of W-2 income, multiply .062 x (106,800 - 50,000), and we'll call that Social Security Deduction.

OK, so now take Gross, Subtract the Medicare Deduction and the Social Security Deduction, and then deduct the cost of the Partner's contriubtion that will be deducted on his K-1, and that gives you his comp for plan puirposes. Of course, the Partners Contriubtion must be based on Comp for Plan Purposes, so every dollar of contriubtions reduces the comp, which then reduces the contribution, etc. Which is a fun little circular calculation which fortunately excel can handle...

But the real reason I wrote this lentghy answer is because I wanted you to appreciate that this is actually a very complicated thing, and it sounds to me like you should get some help (no offense intended)...

[K2retire]

Austin, I've been doing the calculation for years. As a numeric formula, I understand it completely. But I've always struggled to explain it to clients. Yours is the best verbal explanation I've seen. Thanks!

[Lori H]

Earned Income is basically K-1 Box 14A net of 179. Reduce that by the employee cost (unless already deducted in arriving at 14A). We'll call this "Gross". Multiple that by .9235 and mu.tiple by that by 1.45%. Will call this Medicare Deduction. Now, take the SSWB, and subtract whatever W-2 income he had. If he had more than 106800 of W-2 income, you're done, no SS deduction. If he had, say, $50,000 of W-2 income, multiply .062 x (106,800 - 50,000), and we'll call that Social Security Deduction.

OK, so now take Gross, Subtract the Medicare Deduction and the Social Security Deduction, and then deduct the cost of the Partner's contriubtion that will be deducted on his K-1, and that gives you his comp for plan puirposes. Of course, the Partners Contriubtion must be based on Comp for Plan Purposes, so every dollar of contriubtions reduces the comp, which then reduces the contribution, etc. Which is a fun little circular calculation which fortunately excel can handle...

But the real reason I wrote this lentghy answer is because I wanted you to appreciate that this is actually a very complicated thing, and it sounds to me like you should get some help (no offense intended)...

Austin, thank you kindly and no offense taken. Generally on these K-1's the members blow by the 415 limit. This case is different. The company CPA is reporting 6 month k-1 151,541 in SE earnings then reduced that by Sec 179 deductions of $3759 which gives a net of 147,987. The CPA is basing the participant match on that amount, in this case, a Safe Harbor 4% match of $5919. The CPA is also allocating a $12,900 PS allocation. They are reporting Gross pay on w-2 of $80,085. By “employee cost” if you mean her deductions and match BEFORE becoming a member, yes that has already been deducted in arriving at her member earnings. I am not sure what comp number you use to determine this participants SH Match????

Do you have to back out 1/2 SE tax out of the Net SE Earnings to determine what the participant receives as a match?

[austin3515]

Austin, thank you kindly and no offense taken. Generally on these K-1's the members blow by the 415 limit.

See what makes me nervous about you (for your own good) is that I believe what you means is they blow by the 401(a)(17) limit, relating to maximum compensation. Not the 415 limit relating annual additions. This is a pretty basic concept in retirement plans.

By “employee cost” if you mean her deductions and match BEFORE becoming a member

No, I mean the partner's pro rata share of the contribution expense for all of the employees. Generally, the TPA is calculating that number for the CPA's, so the CPA;s generally don't have the dedution taken out when they provide us TPA's with the K-1'.

This calculation is second only to New Comp / rate group testing as far as complexity... I'm not sure message boards are the rihgt place for an advanced plan design trainng session...