Plan termination and self employment income

[Guest tmills]

A partnership sponsors a 401(k) plan. Partnership operations effectively ended 3/31/13, which was the last day of employment for all W2 employees. All contributions due them have been made. The issue now is determining the partners net earnings from self employment (NESE). The partners will have positive earnings through 6/30. However, in August a large final malpractice insurance premium along with some other items will result in negative earnings for the second half of the year. For the entire year, NESE will be minimal to negative.

Accountant wants to know if a plan term date of 6/30 is established, can the partners use NESE through 6/30 to base their contributions on? Obviously using 6/30 will result in the 415 limits being cut in half, but that is not a concern. I have been unable to find anything definitive. The best argument I have against this idea is the fact that partners will get K1's for the year that will not support the contributions made using earnings as of 6/30. W2 employees will get W2's that do support their contributions. They are obviously trying to game the system, but I would like a better argument than the previous one, if possible. Should partnership plans only terminate at year end because of this issue?

Another thought is for them to terminate the partnership and become a corporation as of 7/1. If they take no compensation for the last 6 months, then that combined with their NESE for the first 6 months will get them where they want to be. There are probably dozens of non-retirement plan reasons why that won't work, but that is the accountant's problem.

Any thoughts are appreciated.

[K2retire]

This may be an oversimplification, but as I understand it partners have no income until December 31. Terminating the plan June 30 doesn't change that.

[Guest tmills]

That's the best I've been able to come up with.