Negative Earnings

[Guest psu83]

One of our clients (An LLC) has a partner that is involved in a variety of different business ventures. He has W2 income from our client but his overall total income (including all his business ventures) was negative for 2010. His accountant called and stated that all his deferrals for 2010 need to be distributed back to him.

Is this correct?

Thank you

[ETA Consulting LLC]

Yes. There must be income in order to defer.

[Tom Poje]

this was made clear in the preamble to the final 401k 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.

[Kevin C]

Did his business ventures adopt the plan?

[Guest Sieve]

But, Tom, if an LLC member has W-2 income from an LLC treated as a corp, why can't there be deferrals from W-2? That W-2 income is not income from self-employment, right? It's not a partner's draw.

[rcline46]

How does a PARTNER in an LLC have W-2 income? A MEMBER may have W-2 if the LLC is taxed as a C Corp or Sub S. If taxed a a partnership, he would have a K-1.

If he has a K-1, then I think the accountant is correct. However, if he gets a W-2 for real, then I think he can defer from the W-2, and other business interests would not count. Unless the other businesses are in a controlled group/affiliated service group with your client LLC.

It is very messy, and the facts have to be very clear. I have learned not to trust too many CPAs when it comes to any qualified plan issues.

[Tom Poje]

I'd agree, knowing all the facts is important.

still, if I understood the original post correctly, for plan purposes the total 415 income is 0 (or negative), I'm not sure how one would get around the 415 limit (except perhaps for a catch up contribution)

[Guest Sieve]

Tom --

If this person is a member of an LLC treated as a partnership, and therefore is self-employed, & if the entities are not members of a controlled group, isn't each self-employed business venture treated separately?

[Tom Poje]

Sieve- I don't know, I'm in the sub-minor leagues when you start getting into the ramifications of controlled groups and the different partnership, LLC, and stuff. As I indicated, I'd have to know all the different facts and circumstances, etc. , and then hunt down someone like Darren Watson who knows everything about stuff like that. (I didn't even think about controlled groups based on the original posts)

on the other hand the following is

the example used in the ERISA Outline Book (2008) :

7.d.1)Example. Devon is employed by both corporations A and B. The corporations constitute a controlled group of businesses as defined in IRC §414(b). Devon receives compensation from both companies. To determine whether the section 415 limits are exceeded with respect to Devon's participation in any plan maintained by either corporation, Devon's section 415 compensation from both corporations must be aggregated. Thus, if Corporation A maintains a plan, but Corporation B does not, Corporation A’s plan still must count Devon’s compensation from B to compute Devon’s section 415 compensation. Similarly, if each corporation maintains a separate plan, Devon’s combined compensation from both businesses would be used to compute his section 415 compensation under each plan.

based on that I would say the guy is out of luck (again if he is catch up eligible then the catch up could stay in the plan.)

[Guest Sieve]

I agree if a controlled group (as in your cited example), but I think you'd use separate comp numbers if there was no controlled group (even if self-employed as to each entity).

(...Go Wings!...) -- Oh, well--can't win 'em all!!

[Guest psu83]

How does a PARTNER in an LLC have W-2 income? A MEMBER may have W-2 if the LLC is taxed as a C Corp or Sub S. If taxed a a partnership, he would have a K-1.

If he has a K-1, then I think the accountant is correct. However, if he gets a W-2 for real, then I think he can defer from the W-2, and other business interests would not count. Unless the other businesses are in a controlled group/affiliated service group with your client LLC.

It is very messy, and the facts have to be very clear. I have learned not to trust too many CPAs when it comes to any qualified plan issues.

You are correct, it was a K-1 not a W-2.

I believe I need to distribute all contributions made during 2010 (both regular and roth) plus interest earned back to the partner. Does anyone know an easy way to calculate the interest earned using relius admin software?

Thanks

[Tom Poje]

well, I suppose on Relius the easiest way to 'trick' the system would be to tell the system ADP is using prior year testing, and prior year testing for the NHCE was 0. this should cause the system to generate a report indicating a return of all deferrals for all HCEs along with the gains. Its a fake simply to obtain the amount of earnings on the one person, but after all, you only asked for the easiest way. Logically that should work. Then of course you would go back and redo the test so you have the correct results on the system.

Again, if the person is over age 50 it seems like you could count some of the amount as catch up, because amounts the 415 limit are eligible for catch up, though that really seems strange when you have no comp, but you sort of did, at least from one end of the business.