K-1 Income & Cash Balance Contributions

What's the best way to explain why Cash Balance Contributions can exceed the income on a K-1 to an accountant?  We have a group who ultimately would show a very small income on their K-1:

I believe they are contributing $120k into the Cash Balance, while the total income is $132k

The accountant doesn't understand how it's possible and is concerned about a potential audit.  We defined the benefit as a set dollar amount, and the maximum deductible is within the $120k.  Also, it is a 2 person Plan with both participants being owners.  So there is no discrimination testing to worry about.

Thanks in advance!

Are you describing 120k as the minimum required contribution (MRC) or the pay credit, there is a big difference between the 2.

You MRC might be 10k and that is all you have to contribute.

This is all I can say without knowing anything else.

1 minute ago, Jakyasar said:

Are you describing 120k as the minimum required contribution (MRC) or the pay credit, there is a big difference between the 2.

You MRC might be 10k and that is all you have to contribute.

This is all I can say without knowing anything else.

No, the credit is far less.  They want to overfund to the tune of $120k (the minimum was around $75k), so they would only be showing income of $12,000 on their K-1 (since it's reduced by the contributions).  The accountant is concerned that showing such a low income, compared to the size of the contribution, is going to be an issue.

In the document we set the contribution as a set dollar amount, not a percentage of pay, so from the MRC standpoint it's not dependent on the compensation. 

Basically, I'm just trying to explain to the accountant that it's OK to have such a big contribution ($120k) vs. low K-1 income (about $12k).  Any guidance on how you've explained it, or anywhere you can point me in the direction of what to show them would be extremely helpful.

Thank you!

Is this a partnership or a corporation? If it is a corporation, K-1 has nothing to do with the contributions. If this is a partnership, K-1 should not be reduced by contributions.

1 hour ago, Calavera said:

Is this a partnership or a corporation? If it is a corporation, K-1 has nothing to do with the contributions. If this is a partnership, K-1 should not be reduced by contributions.

It is a partnership.  I'm not going to pretend to understand the accounting side of things, but if it's a partnership how is the contribution reported?  They still get a tax benefit, correct?

Partners K1 is their income net of partnership expenses but their retirement plan contributions are deducted on their 1040. Without knowing details, I assume a reasonable 415 limit had already been established such that having a very low 2023 plan compensation after all adjustments to and deductions from income does not cause issues there.

Just adding for a clarification. If this partnership would have other employees, contributions toward the benefit of these other employees will be deducted on a partnership level, therefore reducing K-1s for partners. As mentioned above, the 2023 net earned compensation will be very low, so we assume that net earned compensations in prior years were high enough to support all 2023 calculations.