LLC Taxed as a Partnership - Prefunding Contributions

[emmetttrudy]

An LLC taxed as a partnership wants to fund some employer contributions during the year for the partners. However, it is not known what their earned income will be until the end of the year, so it's difficult to estimate what the final safe harbor match and/or profit sharing #s will be. Historically their comp has been well over the $245k limit to support the max contributions. BUt what if at the end of the year it's not? Are there any guidleines of what is ok to contribute during the year?

[PensionPro]

From the preamble to the final 401(k) regs:

One commentator asked for clarification of the interaction between these timing rules and the rule under the regulations that treats a self-employed individual’s earned income as being currently available on the last day of the individual’s taxable year and whether this last day rule precludes a partner from making elective contributions during the year through a reduction in the partner’s draw. The restriction on the timing of contributions is not intended to prevent a partner from deferring amounts that are paid to the partner throughout the year on account of services performed by the partner during the year, and the final regulations have been modified to clarify this point. However, self-employed individuals who take advantage of this opportunity to defer amounts during the year must make sure that the amount contributed during the year will not exceed the limits (such as the limits of section 415) that will apply to the individual, based on the individual’s actual earned income for the relevant period.

[emmetttrudy]

So if their compensation will support the maximum employee and employer contributions then they are ok funding throughout the year. But if they are uncerain how things will pan out throughout the year compensation-wise they just need to be conservative in how much they contribute and make sure they do not go over what would be allowable.

[PensionPro]

That sounds right. With employer contributions there may be allocation issues especially if there are common law employees involved.

[QDROphile]

Can you generalize beyond the special rules in the regulations for elective deferrals? If you can, then the special rule about income on the last day of the year is simply a special privilege for partners that allows disregard of the election timing requirements.

[K2retire]

Are they also prefunding those employer contributions for the employees?

[PensionPro]

Can you generalize beyond the special rules in the regulations for elective deferrals? If you can, then the special rule about income on the last day of the year is simply a special privilege for partners that allows disregard of the election timing requirements.

A partnership depositing employer contributions during the year is not much different from a corporation doing likewise, except there is an increased likelihood of miscalculations. The allocation will need to follow the terms of the plan document. An excise tax will be due on nondeductible contributions if any. There is no special statutory limitation or prohibition on a partnership prefunding employer contributions that I am aware of.

[austin3515]

But if the plan has a last day rule, and/or there are employees who are not receiving the same deposits during the year, then I'd say you have some problems not unique to partnerships.

[Guest M. Martin]

If a partnership takes a conservative approach and does not fund 401(k) contributions throughout the year from draws, what happens when a partner terminates during the year but had written election in place to contribute a certain percentage or dollar amount? Would their 401(k) contribution: 1) be funded once their final earned income was determined, 2) funded at the time of termination, or 3) they aren’t able to make a 401(k) contribution for the year?