Earned Income

[TBob]

Plan sponsor of a 401(k) profit sharing plan is a partnership. The partnership employes a dozen or so employees. One of the partners is an individual (A) with K-1 income prior to deduction for plan contributions and 1/2 SE tax that is approx 200K. The other partner is a corporation The corporation is owned by individual (B) and both he and his wife receive w-2 income from the corporation. The partners share expenses 50/50.

When calculating the earned income for individual A, I need to adjust his income for his share of the contributions to the plan for the employees. The question is, do I include the contributions to the plan for individual B and his wife before I divide the plan contributions by 2 to determine individual A's share of the expenses?

It would seem to me that I do not include their contributions but I get really confused with these odd structures.

[TBob]

Bueller....Bueller....

[K2retire]

Is the corporate partner also an adopting employer in the plan? Is the contribution for the partners being paid by their companies (the sole prop. and the corp.) or by the partnership?

[TBob]

The corporate partner is a participating employer in the plan. The contributions for the staff and for Individual (partner) A are being paid by the partnership. The contributions for individual B and his wife are being paid by the corporation.

Would your answer be different if the partnership were paying all of the contributions including those for Individual B and his wife?

[Lou S.]

Plan sponsor of a 401(k) profit sharing plan is a partnership. The partnership employes a dozen or so employees. One of the partners is an individual (A) with K-1 income prior to deduction for plan contributions and 1/2 SE tax that is approx 200K. The other partner is a corporation The corporation is owned by individual (B) and both he and his wife receive w-2 income from the corporation. The partners share expenses 50/50.

When calculating the earned income for individual A, I need to adjust his income for his share of the contributions to the plan for the employees. The question is, do I include the contributions to the plan for individual B and his wife before I divide the plan contributions by 2 to determine individual A's share of the expenses? It would seem to me that I do not include their contributions but I get really confused with these odd structures.

What does the partnership agreement say? What is their understanding of how it will be done? How does their accountant think it should be done?

I think that B's contribution should not be charged to A as he's really a partner (assuming B owns 100% of the corp).

B's wife it sort of depends on if she is a real employee or if she is on the payroll for other reasons. If she's a real employee and they split the employee contribution 50/50 then B's wifes contribution should be allocated 50/50.

[masteff]

The contributions for individual B and his wife are being paid by the corporation.

How could the partnership deduct an expense of the corporation?

I see it as a two companies in a control group plan. A member of a CG does not deduct the contributions made by some other member of the CG.

[K2retire]

But I have worked with similar plans where the contribution for the employees of the corporation would exceed the 25% deduction limit. In that case, the rest has typically been paid by the partnership and a corresponding accounting entry to the partner's capital account made.