Partnership earned income/deferrals

[Doghouse]

Hello all,

I have a client who is a partnership with 3 partners. Each of these partners receives both K-1 and W-2 income. No comment on the appropriateness of that - it shouldn't be possible but it happens all the time.

In any event, both the 401(k) plan and the partnership are on a calendar tax year. All three partners made deferrals from their W-2 income. Now the plan is terminating effective 6/30/10.

For the purpose of ADP testing, would you say the testing compensation is zero (because earned income is deemed to be paid on the last day of the tax year, which hasn't been reached) or the W-2 compensation through the date of plan termination? Obviously the client would like to to avoid refunding all their deferrals for the year due to 415 issues.

Any help is much appreciated!

Dog

[Guest Sieve]

Why not stop deferrals, but actually terminate the plan effective 12/31/2010?

[Doghouse]

I suggested that but the partnership is being dissolved and absorbed into the buyer effective 6/30/10 and the client is insistent upon having everything distributed by 7/31.

[Guest Sieve]

Talk to the CPA. If the partnership is dissolved, does that make the last day of this last taxable year some date other than 12/31? If there eventually is, in fact, earned income for the partnership for the year, then I would suspect that that's the comp you have to use--no earned income, no deferral permitted.