K-1 Compensation Question

[austin3515]

Partners have ordinary income and Guaranteed Payments. Can we amend the Plan to exclude from the calculation of earned income Ordinary Income (but NOT Losses)? The situation is that the CEO is a 10% owner and does NOT want the extra match attributable to his ordinary income. I know I cannot exclude the losses because if I did their match rate would be higher than the rank and file and that would not pass nondiscrimination.

They want the match to be based exclusively on guaranteed payments.

I also recognize for nondiscrimination testing, I would still use the statutory definition of earnings.

[Lou S.]

If you are asking can you exclude a portion of HCE income in the calculation? The answer is yes as you will clearly have a non-discriminatory definition of compensation, assuming you are not excluding some NHCE pay which would get you into a 414(s) test on compensation,

The question then just becomes, how do you write the definition of compensation into the Plan Document to get what you want.

[austin3515]

If the question was about bonus, I would not have thought twice. I just wasn't sure if GP's and OI were so intertwined one could not be distinguished from the other for these purposes.

But I am inclined to agree with you. My definition would simply say, The determination of Earned Income with respect to the calculation of Employer Matching Contributions shall be made by disregarding positive ordinary income reported on the K-1, but taking into account any ordinary losses reported on the k-1.