Owners Getting Paid via 1099 & Participating in Plan

[metsfan026]

We have a potential client where they have a company 401(k) Plan, but the two owners technically aren't on payroll.  Instead they are paid via 1099.

Can they setup their own individual 401(k) instead of participating in the company plan?  Is there any testing issues if they opted to go that route?

Thanks in advance!

[QDROphile]

What is your role/concern?

Are you starting with skepticism that their income reporting is incorrect? What if it is incorrect?

 

[David D]

I think clarification is needed on this. If the owners of the company are sponsoring a 401k plan, it's either an incorporated business for which they are not being paid wages, therefore cannot defer, or it's unincorporated in which their income should pass through to their Schedule C or K-1 as self employment income.  Typically the business would pay independent contractors via 1099, but it doesn't seem right that the owners of the business would qualify as independent contractors.  It seems to me they are already eligible for the plan they sponsor unless specifically excluded.  The only potential qualification issue is if they sponsor a Safe Harbor Non Elective 401k plan and were entitled to Safe Harbor Contributions based on their SE income and did not make that contribution.

[CuseFan]

Agree with @David D - including the 1099 situation not appearing correct unless something else going on. Are the owners each single member LLCs that own the company and company then pays the LLCs via 1099s. Even so, the LLCs would be either incorporated (C or S) or not (sole prop) and pay their owners via W2 or K1, respectively. Then (I think) the LLCs are disregarded entities and their earned income should count for 401k plan. If that's not the case then that whole 1099 situation is wrong IMHO - but I'm not an accountant.