justanotheradmin Posted August 22 Posted August 22 Is the Earned Income reported on Form 1065 K-1, income for the individual for purposes of the 401(k) plan if the K-1 is issued to a P.C.? My answer is no, but I am second guessing myself and want another opinion. Scenario Plan Sponsor: LLP , Participating Employers are two P.C.s LLP has regular W-2 employees that participate in the plan. Those are not in question. The shareholders of the LLP are two Professional Corporations and are clearly listed by the P.C. names on the individual 1065 k-1. Think "Jane Garcia, a Professional Corporation". The LLP as well as the P.C.s appear to be listed as active with the Secretary of State. Line i2 says "What type of entity is this partner?" and it says S Corporation. Jane Garcia - receives a Form W-2 from her P.C. She does not receive a W-2 from the LLP. Jane is arguing that the earned income on the Form K-1, from the LLP to the P.C. counts as personal earned income to her and also as plan compensation. Since the actual shareholder is a corporation, and is listed as one both in name and entity type, my understanding is that the earned income reported on the K-1 is NOT personal tot he individual. But I am getting so much push back from "Jane" and her advisors that I am second guessing myself. I am not a CPA, so I suppose its possible that there are special rules that apply to P.C.s that I am unfamiliar with so figured it would not hurt to ask the hive mind. I'm a stranger on the internet. Nothing I write is tax or legal advice. I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?
Popular Post Paul I Posted August 22 Popular Post Posted August 22 Certainly what the plan says about compensation will have a bearing on the answer, but the following observation may help focus on what appears to be a disconnect in Jane's argument. If I follow the description correctly: Jane's S-corp PC owns part of the LLP. Jane's S-corp PC gets earned income from the LLP which would be reported on a Form K-1 (1065) Jane's S-corp PC would send Jane as an S-corp shareholder a Form K-1 (1120s) which would identify her W-2 earnings, S-corp dividends and various other allocations of income and expenses. Jane receives a W-2 from Jane's S-corp PC. I expect that Jane's income on the W-2 is less than the income Jane's S-Corp PC received from the LLP by amounts listed in the 3rd bullet, and Jane would like to have the higher income considered as plan compensation. The amounts reported on Form K-1 (1065) to Jane's S-corp PC is not plan compensation, and only Jane's W-2 income from the S-corp is plan compensation. There always do seem to be some special rules somewhere out there, but the reporting path for Jane's income should be fully documented through all of the returns filed for Jane and her businesses. Jane or her advisors should be willing to provide that information to you. Bill Presson, David D, justanotheradmin and 2 others 5
CuseFan Posted August 25 Posted August 25 Agree with Paul I, only her W2 pay from PC S-corp is compensation. If it's not subject to FICA and Medicare (or self-employment SECA) taxes (unless an exempt deferral such as a 125 plan) then it is not earned income and cannot be compensation for retirement plan purposes. David D and Bill Presson 2 Kenneth M. Prell, CEBS, ERPA Vice President, BPAS Actuarial & Pension Services kprell@bpas.com
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