Top Heavy Key Employee Partnership K1 Wages

[jmartin]

Have a plan with about twenty-five or so partners who file a K1. Most of the partners have ownership but below 5%. A 1% owner (or really between 0-5%) would become a key employee if their "wages" exceeds $150k. For a partner, what "wage" should you use?

For example, a partner with 2.5% ownership has $162k reported on K1. After reducing by his share of the non-key employer contribution, 1/2 SE tax, and their own employer contribution, his "plan compensation (or testing compensation) is $146k.

If I use the 162k, he would be a key. If I use the $146k he is not. The plan is going to be top heavy no matter what but wanted it to be precise since we recently took this plan over.

[ETA Consulting LLC]

You'd use the $146K because that is the statutory definition of his "Earned Income" for plan purposes. Keep in mind that he "MAY" become a "Former Key" employee, and should be treated as such during this analysis; as Former Key Employees are excluded from the analysis.

Good Luck!

[jmartin]

You'd use the $146K because that is the statutory definition of his "Earned Income" for plan purposes. Keep in mind that he "MAY" become a "Former Key" employee, and should be treated as such during this analysis; as Former Key Employees are excluded from the analysis.

Good Luck!

Followup question. Say the participant earned $160k in 2010. In 2011 he earned $146k. My guess is he is a key for 2010 and a former key for 2011. Would you agree?

[MoShawn]

12/31/10 determination to determine plan's TH status for 2011 = Key

12/31/11 determination to determine plan's TH status for 2012 = Former Key