Partner 402g issue

[austin3515]

Partner has a negative k-1, earned income figure for 2011, but has already funded their 401k. How does this work in the absence of a w-2? Just do the refund by 4/15/12? But then the 1099 will say "taxable in the prior year" but there won't be a w-2 showing a deduction for the corresponding amount?

[ETA Consulting LLC]

You could either correct as a 415 excess or a 402(g) excess. Either one would give you this effect. I'd say that if the "company" is going to fund an employer contribution of any amount, I'd offset this contribution and correct the partner outside of the plan. There are several approaches, as the rules aren't design to tax him twice. They just never anticipated someone with no income making a deferral (as the partner in a partnership seems to the be only situation where this is possible).

Another approach to look at is to (like your already suggesting) offset both amounts on the 1040 of the individual partner.

Good Luck!

[austin3515]

No other employer contriubtions will be made - it's 401k only. Also the money needs to get back to the individual.

[austin3515]

I was saying 402g, but I was sorely mistaken ... Nothing at all to do with 402g.

This is the approach I'm taking. No comp = not eligible to make any contributions. Ineligible contriubtions returned to plan sponsor, plan sponsor makes this former partner whole outside of plan.

I couldnt do a distriubtion w/ a taxable 1099 code because the participant never took a deduction on it in the first place, so payment directly to the participant from the plan had to come off the list.

I've got a short list of options and this just seemed like the best one.

[jpod]

What kind of "trade or business" is this? I'm sure you are certain about this, but I'll ask: No guaranteed payments on the K-1? No W-2 wages (partnerships often think, mistakenly, that a partner can get both a W-2 and a k-1)?

[austin3515]

GP's are less than the loss, but it never hurts to ask! And no, there was no W-2 income. He left the company altogether.