solo 401k plans for highly compensated s-corp owners

[tomf]

I have a two part question and need advise. I and another highly compensated partner started an s-corp. We have NO employees other than ourselves. We both own 50% of the company so we report the majority of our income on W-2's and the rest of the income is divided equally and reported as profit sharing on K-1's. In addition, the s-corp is a partner in a general partnership. There are 9 partners in the general partnership some are incorporated and some not. The general partnership has NO employees.

My partner and I in the s-corp each opened a solo 401k and have been contributing to both. The s-corp as the employer and the two of us as the employees.

My first question is, my partner and I, are we allowed to contribute to solo 401ks? Are owners of s-corps who are highly compensated with no employees other than themselves allowed to have this type of retirement plan?

My second question is, our corporation allowed to start a retirement plan without including the other partners in the general partnership, I have not asked but the other partners in the general partnership probably have their own retirement plans.

I would like to thank you for any time spent on this post.

Sincerely,

Tomf

[Mike Preston]

Are you "allowed"? Subject to the second question you pose, absolutely yes. I can't say whether it is wise, though.

The second question is much more difficult. In the vast majority of cases, the answer here will also be yes. But one would need to know the nature of the partnership and the various ownership percentages along with maybe some details as to what percentage of your S-corp's revenue is generated from its partnership interest.

I applaud your desire to do things correctly.

[tomf]

I greatly appreciate your information and advise. The s-corp. holds 2 shares in the general partnership because there are two of us in the s-corp. The other 7 members of the general partnership each have one share in the partnership. The s-corp. generates 95% of it's income through the partnership, approximately $550,000 and additional income of $20,000 is generated outside of the partnership to the s-corp. I read the IRS publication on retirement plans (I believe form 560) and it did not clearly mention owners of corporations as participants in solo 401ks.

[QDROphile]

Employees cannot maintain personal 401(k) plans with respect to their W-2 income. You should also get acquainted with section 401© of the tax code. A partnership is the "employer" of an individual who has self-employment income, and the individual is an "employee." You probably need to buy some competent professional advice to find some compliant arrangements for yourself and others.

[Mike Preston]

QDRO, read his original message. He already stated: "The s-corp as the employer and the two of us as the employees". Directing him to 401 © is not helpful. Mentioning partnerships is not helpful.

While I don't disagree with your conclusion, the rest of your post is more likely to confuse than untangle.

[QDROphile]

The original message also said that each of them has their own 401(k) plan, presumably as employees of the S corporation. Then it goes on about 401(k) plans in a partnership context and uses the term "partner" to apply to each of the employees of the S corporation. Who knows the actual circumstances? I only know that the correct assessment and advice cannot come from the message boards.

[Mike Preston]

Sigh. I would be flabbergasted to find that he meant anything other than the fact that he and his "partner" each own 50% of the Sub-S. While you can claim to be technically correct that he used the words "my partner" to refer to his 50% co-owner, and that he shouldn't have, for you to jump on that and point him in the direction of the self-employed is downright mean-spirited (and that is the kindest thing I can think of to describe it).

Come on, the guy isn't a pension professional and is looking for a little guidance. I think he did a great job of describing what has been done and while it is not terribly usual for a single entity to have one 401(k) plan for each employee, there is nothing wrong with it at all.

And, with all that said, I still agree with your last sentence.

[QDROphile]

I may have seriously underestimated the understandings and arrangements described in the post.

[tomf]

I apologize for the misunderstanding about partner in the s-corp. Allow me to rephrase the s-corp. arrangement to the other co-owner and I each are the only employees and only owners of the s-corp. Partners should have only been used in describing the general partnership and the s-corp. receives it's income from the general partnership as a partner. Again, I thank you for your assistance.

[Mike Preston]

Tom, let me recap a bit. The simplest solution for you would be achieved if you could definitively rule out the possibility that the partnership is part of an Affiliated Service Group (ASG) with you and your co-owner's S-Corp. If so, then it is perfectly permissible for your S-Corp to sponsor two separate 401(k) plans, one for each of you.

However, nothing you have written allows a definitive conclusion regarding the existence or lack thereof of an ASG. If you can state the nature of the partnership (that is, what does the partnership do to make money) and the nature of what you do to earn the approximate $20,000 that does not come from the partnership, it just MIGHT be possible to rule out the existence of an ASG.

Fair warning: it is far from certain that even if you provide this information a definitive conclusion can be reached. It is far more likely that it will just lead to more questions.

If you are trying to make a determination before the end of the year (for whatever reason) I urge you to abandon these forums and hire somebody (not me, I'm far too busy between now and the end of the year).