Self Employed Income Multiple Partnerships

[Stevo-PDX]

Here’s an interesting compensation question:

Partnership 1 is owned by Company A, Partnership 2 and Person C.

Partnership 2 is 100% owned by Person C.

Partnership 2 received a K-1 from Partnership 1

Person C receives a K-1 from Partnership 1

Person C receives a K-1 from Partnership 2

Retirement plan is sponsored by Partnership 1

Partnership 2 is not a sponsor of the retirement plan (neither is Company A).

The CPA believes that “pension law” dictates that the K-1 pass-through income from Partnership 2 onto IRS form 1040 Schedule E for Person C should be included for Plan Compensation purposes. My gut feeling is that Person C nor Partnership 2 are adopting employers to the plan and only the K-1 from Partnership 1 is Plan Compensation and only their K-1 from Partnership 1 is eligible Plan Compensation subject to the an EIC.

If Partnership 2 adopted the plan too, that seems to resolve this question going forward except Person C’s ownership in Partnership 1 would only total 34%.

Should the K-1 self employment income from Partnership 2 be included in the eligible plan compensation?

Thanks

[Kevin C]

Does this help?

1.401-10(b)(2)

If a self-employed individual is engaged in more than one trade or business, each such trade or business shall be considered a separate employer for purposes of applying the provisions of sections 401 through 404 to such individual. Thus, if a qualified plan is established for one trade or business but not the others, the individual will be considered an employee only if he received earned income with respect to such trade or business and only the amount of such earned income derived from that trade or business shall be taken into account for purposes of the qualified plan.

The plan document should have similar language. Our VS document has it in the definition of Earned Income.

[Stevo-PDX]

Great! Thanks Kevin. That's what I was looking for.