Partner matching contribution calculation

[jsample]

The plan document states the employer makes the match on a payroll basis.  A Partner taking draws makes their deferral contribution one time at year-end.  Is the Partner's match calculated on their full year's Schedule C compensation?

[K2]

I would agree with that.  Compensation isn't known or earned until the Schedule C is done.  Everything contributed before that based on draw, while allowable, is really just pre-funding.

[K2retire]

If there are NHCEs who would have received more match if calculated on annual pay, do you end up with a benefits, rights and features issue?

[K2]

I don't think this is a true up, so I don't think there is a BRF.  Draw is not salary.  Earned Income is salary.

 

[DMcGovern]

A few comments here bother me.  "Pre-funding" deferrals is not really allowed, although I'm not aware of anything that disallows deferrals from draws.  Then there are the comments that draw is not salary, earned income is.  So, constructive receipt of income for a partner occurs when the Schedule C is prepared?  Or is it on the last day of a calendar year?

I don't recommend Partners contributing deferrals from draws.  Once the Schedule C has been prepared they may have zero income. 

[CuseFan]

also, does the plan really say the match must be deposited on a payroll period basis or that it is determined on a payroll period basis - just because you calculate it on that basis so future deferral activity doesn't affect prior match calculation doesn't mean it has to be deposited before the legal due date unless plan specifically says so.

[BG5150]

^ Unless it's a Safe Harbor Match.  Then it has to be put in by the end of the following quarter.

[K2]

Compensation can't be determined until the schedule C is done.  It's technically earned on the last day of the year.  The IRS has said it's OK to contribute from draw provided you fix it when schedule C is done.  I'll try to find the cite on this.

[Tom Poje]

It is in the preamble to the final 401k regs (page 12 of the copy I have)

One commentator asked for clarification of the interaction between these timing

rules and the rule under the regulations that treats a self-employed individual’s earned

income as being currently available on the last day of the individual’s taxable year and

whether this last day rule precludes a partner from making elective contributions during the

year through a reduction in the partner’s draw. The restriction on the timing of contributions

is not intended to prevent a partner from deferring amounts that are paid to the partner

throughout the year on account of services performed by the partner during the year, and

the final regulations have been modified to clarify this point. However, self-employed

individuals who take advantage of this opportunity to defer amounts during the year must

make sure that the amount contributed during the year will not exceed the limits (such as

the limits of section 415) that will apply to the individual, based on the individual’s actual

earned income for the relevant period.

[Mike Preston]

That is painful to read.  Try this:

One commentator asked for clarification of the interaction between these timing rules and the rule under the regulations that treats a self-employed individual’s earned income as being currently available on the last day of the individual’s taxable year and whether this last day rule precludes a partner from making elective contributions during the year through a reduction in the partner’s draw. The restriction on the timing of contributions is not intended to prevent a partner from deferring amounts that are paid to the partner throughout the year on account of services performed by the partner during the year, and the final regulations have been modified to clarify this point. However, self-employed individuals who take advantage of this opportunity to defer amounts during the year must make sure that the amount contributed during the year will not exceed the limits (such as the limits of section 415) that will apply to the individual, based on the individual’s actual earned income for the relevant period.

[Buffys Redrum]

Not to seem "old school" - but when did it become tolerable to use Schedule Cs when dealing partnerships?  What happened to Schedule K-1s and Page 2 of Schedule E?  Are we really discussing Schedule Cs for partners in a partnership?

[K2]

Same concepts apply to both

 

[CuseFan]

How can "Buffys Redrum" not be "old school"?

But correct, partner is K1 - it's a sole prop for Sched C - and as kc notes, same concepts apply to both.

[401kSpecialist]

To refer back to the original question, can a portion of the partners draw be allocated as their match funding (which will eventually be trued up when compensation is known)? If so, is the match calculated on the draw amount or could it be just an arbitrary prefunded amount based on expected full year match prorated over 12 months?