How much is the covered compensation?

[RayJJohnsonJr]

A practicing physician has a one member LLC with schedule C income of $350,000. The physician owns another one member LLC that is a retail business with Schedule C income of -$180,000. Both incomes are included in the physicians Schedule SE tax tax form.

How much is this person's covered compensation for 401(k) plan purposes?

Thank you

[ETA Consulting LLC]

Good question. I'd say that when income for a single entity falls below zero, then it is considered zero. This would leave income for LLC #1 at $350,000 and LLC #2 at Zero. Overall income would, then, be $350,000. Don't ask me why, but I had my "a$$" handed to me by a room full of industry professionals (actuaries) at ASPPA this past year by when trying to argue the opposite. My view WAS that it would be $170,000.

Good Luck!

[RayJJohnsonJr]

Thanks, ERISA Toolkit. I thought my question was so dumb, I almost didn't post it. I'm glad I did now.

[Bird]

If both businesses are adopting employers, I'm not sure why you wouldn't net the profits. If you don't, then it would be pretty easy to manipulate income and have, say, $200,000 in one business, justifying a $50K contribution, and -$150,000 in the other, so you're then sheltering 100% of your net $50K profits.

I think it boils down to what you're paying SE tax on. If you pay SE tax on $170K then that should be earned income for retirement plan purposes. That's just my own simplistic logic, without trying to parse code and regs, which I'm not sure hold the answer.