Self Employed net income for 401k Plan

[Pammie57]

The client sponsoring the 401k Plan is a partnership.  Throughout the year, the partners deferred on their draw and calculated the 3% safe harbor calculations.   They put in the maximum of $24,000 (both over age 50) ....However, when  I received their K-1s - box 14a only had $24,000 as  self employment earnings and there is Section 179 deduction of $2035.   So I see a problem.... Am I wrong in using box 14a  (Schedule K-1, Form 1065)....They had draws of 192,000 and $108,000 so their 3% was calculated by their payroll dept. based on the draws.... Any insights or comments on how to fix this would be welcome......

 

[Larry Starr]

You first need to ignore what they did, and instead calculate their net self employment income for plan purposes (which will include the various reductions for Sec 179 deductions claimed, unreimbursed partnership expenses claimed, and the always popular (but rarely seen) oil and gas depletion allowance claimed.

You also have to apply the reduction for the employee share of the plan contributions allocated to each partner.

Now, you have a number you can work with for the purpose of the individual partner deferral and safe harbor allocation (and the circular calculations that the employer contribution entails).

NOW, you are ready to compare those "correct" numbers to what was actually done, and if what the did is wrong, now you apply normal corrective methods.

You CANNOT always depend on box 14a to provide all the information.  We like to have the K-1s for each partner PRIOR to the employee allocations, how much of the employee allocation is allocated to each partner (if it isn't based on their calculated net income), the special deductions claimed by each partner (noted above) and, of course, the "deferrals" intended for each partner.

Now you have all the "stuff" to do the numbers correctly, and the results will tell you what fixes you have to make.

[coleboy]

Wow, I am totally confused now! Are you saying that we should have the K-1's for the year that we are working on prior to what they have deferred or what they want to defer?

We should be asking not only for their K-1's but also for unreimbursed partnership expenses claimed?

For many years, we rarely have the plans we had just involved regular ol' W-2 income for both the owners and the employees. This past year, we have taken on many new plans where the owners will be taking draws, etc.

This may be too much for my old tired brain! Maybe you should do a mini webinar on this, Larry.

[Mike Preston]

Been there, done that. Larry's outline for his compensation presentations at various ASPPA Annual conferences is a classic.  If you ask him real nice he might even send you a copy.

[Larry Starr]

9 hours ago, Mike Preston said:

Been there, done that. Larry's outline for his compensation presentations at various ASPPA Annual conferences is a classic.  If you ask him real nice he might even send you a copy.

Yes, I am the one that originally figured this all out when the law changed and taught the world and all the software vendors how to do the calculations. Ultimately, the software of most of the vendors now provides all you need, but my outline still shows you why and how you have to do this and why you absolutely cannot depend on anyone else to give you the correct numbers.  If anyone sends me their email address and asks for my self-employed calculations outline, I'll be happy to send along the most current version of it.  Send your email to larrystarr@qpc-inc.com.