Compensation controlled group: SE income on K-1 and W-2

[tghooper]

Facts:

Company A - LLC taxed as a partnership (SE income).  Bob owns 8%; Corp B owns 75%; remaining % owned by 2 others.  Bob owns 100% of Corp B

Question:

Plan defines compensation as W-2 (not 415).  Lets assume that there is a loss on his Schedule K-1 of ($10,000).  Bob receives a w-2 from his Corp B of $40,000.  For non-discrimination testing, I only need to consider's Bob's compensation of$40,000. I don't need to net the loss with his W-2.  Correct?

[duckthing]

I'm assuming from the way you phrased the question that Company A and Company B both participate in the plan. Your plan document probably also a provision specifically defining Compensation for self-employed individuals. Just because you elect "W-2 compensation" in your adoption agreement doesn't necessarily mean anybody who doesn't get a W-2 has $0 Compensation for plan purposes.

[tghooper]

I remember this same scenario that was answered in a TAG Q&A years ago but I don't have access anymore.

[Mike Preston]

I think it is potentially abusive to ignore the loss.  There is no specific method laid out in guidance as to exactly how to take the loss into account.  So just do something reasonable. Keep in mind that some day the plan sponsor might need to answer the question: what would compensation have been had the loss been a $10,000 gain?

[tghooper]

Thank you for the insight gents