Earned Income/key employees/Top Heavy Minimum

[Chippy]

My plan is a LLP and one of the partners has Self Employment Earnings of 151,010.00 before any deductions. he owns 1,20% of the company. When determining if he is a key employee, do I use his self employment earnings which are over 150,000 and would be considered Key or his earned income compensation, which is below the 150,000, which would make him non-key. Not sure if he should be receiving a top heavy minimum contribution.

[Bird]

Well, you have to deduct half of the self-employment taxes no matter what, so if you haven't done that, then you're under $150,000 after you do.

Now, if someone is a little over $150K after the SE tax deduction, then you do still have to subtract the contribution to get plan compensation, so I guess it depends on whether they are getting a regular contribution if they are key, and if so, then it would make them non-key, but does it matter at that point, since they did in fact get a contribution (presumably 3% or more). If they aren't getting a contribution if they are key, then I think that's the end of it; they are key.

[Chippy]

the company is only making the 3% top heavy minimum to non-key employees. After deducting his share of the employees contribution, and his self employment tax, he has deferrals of 17,500 and a match of 1,500. his earned income comes to 140.146. So does that make him a 1% owner earning less than $150,000 and non-key eligible for the top heavy minimum?

or can I use his self employment earnings of 151,010 and say he is a 1% owner earning over 150,000 and therefore is a key employee?

[Bird]

In my book his compensation is 140,146. Sounds like he is non-key.

[Belgarath]

I agree with Bird. Without following through every cross-reference, you can start at 1.415©(2)(b)(2), which is going to refer you to 401©(1) and 401©(2). And that is going to get you eventually to "earned income."

I didn't run down all the cross-references in 401©...going from memory, it isn't necessary for purposes of your question, but you may want to check them all just to make sure.

[PensionPro]

There is a school of thought that believes that for the th minimum contribution key/non-key employees are determined as of the last day of the prior plan year. Therefore current comp should make no difference.