dragondon Posted May 8, 2023 Posted May 8, 2023 I have a client who has 8 employees, 6 of which whom earn a salary and 2 of which who get distributions from the fund each month as their compensation. The distributions are not W-2 compensation. Is there any way that these 2 employees can contribute to a 401k sponsored by the employer? Is there anything on the plan design that would allow for this compensation to be considered qualified compensation for their 401k? If that is not the case is there anyway that they can contribute on an after tax basis or since they technically are not earning any income and since a person cannot contribute more to their 401k then they earn in a year are they unable to add to this 401k?
Bri Posted May 8, 2023 Posted May 8, 2023 Well, if they have no income, their 415(c) limit for after-tax contributions is gonna be pretty small. Lou S. 1
CuseFan Posted May 8, 2023 Posted May 8, 2023 Your background info is not clear - who is the employer, what is this fund from where these two people get distributions from and how is this income reported to these individuals? To contribute to an employer's plan in any fashion one needs to be an employee of that employer (or employee of sponsoring union or participating employer) and have compensation or earned income from the sponsor. If they are not employees they cannot be in the plan. If they are self-employed contractors they can establish their own plans on their earned income. Lou S., Paul I and Bill Presson 3 Kenneth M. Prell, CEBS, ERPA Vice President, BPAS Actuarial & Pension Services kprell@bpas.com
Peter Gulia Posted May 9, 2023 Posted May 9, 2023 The description of the facts suggests some possibility that the two workers who are not W-2 employees might be self-employed individuals who are deemed employees who have compensation to the extent of one’s earned income—net earnings from self-employment, as Internal Revenue Code § 401(c) defines and adjusts these points. With investment-related businesses, it’s common for many workers to be partners rather than employees. Are the two partners of an investment fund they manage? Peter Gulia PC Fiduciary Guidance Counsel Philadelphia, Pennsylvania 215-732-1552 Peter@FiduciaryGuidanceCounsel.com
dragondon Posted May 9, 2023 Author Posted May 9, 2023 Yes @Peter Gulia they are GP's of the fund they manage that has the employees. If the company is not a corporation shouldn't they be able to take an owners draw and defer from that? Or if they earn self-employment income shouldn't they be able to defer from that? If they take an owners draw can they defer from the owners draw or are all contributions from an owners draw considered after tax? If they earn self employment income can they defer directly from the income and this does not have to be after tax? In these instances are distributions for the GP's considered the same thing as owners draws?
Lou S. Posted May 9, 2023 Posted May 9, 2023 If they have self-employment income subject to the self-employment taxes then yes they can defer from that. If they only have pass through income not subject to self-employment taxes then then don't have "pensionable" income. Bri 1
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