Partnership - S Corps as Partners

I've been receiving mixed opinions on this topic. Working with a medical practice. The practice is a partnership where the employees are paid. The partners of the practice are each of the doctors' S Corps. The S Corps are adopting employers of the plan. The doctors don't receive any W2 income from the partnership. K1s are issued to each S Corp. In turn, each S Corp issues a W2 and K1 to the owner. The plan administrator is stating that they will consider both the W2 and K1 issued by the S Corps as compensation for retirement plan calculations. I was under the impression that you can only use W2 compensation when looking at a S Corp but apparently the partnership overrides that rule? Thoughts?  

If an S corporation pays its shareholder employee wages no less than $360,000, does it matter whether another element of income is or isn’t countable?

52 minutes ago, Peter Gulia said:

If an S corporation pays its shareholder employee wages no less than $360,000, does it matter whether another element of income is or isn’t countable?

In that case it does not, but unfortunately many accountants are against paying Self Employment Tax or payroll taxes on wages, so we often see a client incorporate as an S Corp and pay little to no wages and seriously reduce or eliminate their ability to make pension contributions.

2 hours ago, Peter Gulia said:

If an S corporation pays its shareholder employee wages no less than $360,000, does it matter whether another element of income is or isn’t countable?

For the calculation, no. For understanding the calculation and not screwing it up that one year the w-2 IS lower? Yes. 

It's a game accountants like to have their clients play to minimize their FICA and Medicare payroll taxes, which often screws them out of the ability to make maximum retirement contributions (not to mention limiting their ultimate Social Security benefit if below the SSWB).

If W2 is already over the SSWB then it's only 2.9% Medicare taxes they are saving, which is not smart when the retirement contribution percentages missed out on are typically much higher.

S-corp plan comp is W2, K1 is not included, that is not an item open to plan administrator interpretation and if they insist on doing so I would likely resign from that engagement.

Self employment income could be an issue soon for limited partnerships and LLCs - even if they are active in the business and have received SE income for years.  The Fifth Circuit (including Louisiana, Mississippi and Texas) recently defined the term “Limited Partner” for Purposes of the 1402(a)(13) Exception to Self-Employment Tax in Sirius
Solutions, L.L.L.P. v. Commissioner.  While the opinion indicated LLCs were not considered, you can be sure they will soon be a case involving LLCs.

When the Internal Revenue Service had some humans who would read a few individuals’ income tax returns, one might look at an S corporation’s tax return information about the business and an individual’s description of her occupation to consider whether a shareholder-employee’s wages was reasonable compensation for her work.

I imagine now many tax preparers, even some Certified Public Accountants and Enrolled Agents, no longer worry that the IRS might challenge the reasonableness of a shareholder-employee’s compensation.

If a shareholder-employee is tempted to declare wages less than reasonable compensation, does it make sense to declare at least the amount that supports her desired retirement contributions?

8 hours ago, Peter Gulia said:

If an S corporation pays its shareholder employee wages no less than $360,000, does it matter whether another element of income is or isn’t countable?

The doctors have historically paid themselves W2 wages above the compensation limit. Each doctor has a different CPA. One of the CPAs wants to lower their doctor's wages below the compensation limit but I told them that could negatively impact the retirement calculations. In turn, the plan administrator said they will include their K-1 income which makes the W2 amount moot for the calculations. I feel like I must be missing something as I've asked this same question to four different TPAs. Two said they only use W2 wages and two said they would include K1 income (including the plan administrator on the plan). 

Numbers789, when you asked other TPAs, did you make clear that your situation is not about a partner of a partnership or a member of a limited-liability company treated as a partnership, but rather about a shareholder of an S corporation?

If your client (whichever person that is) asks you to perform services assuming the plan administrator’s reckoning of compensation, consider, with your lawyer’s advice, whether to ask your client to indemnify you against your losses and expenses from having followed your client’s instruction—if such a provision is not already in your service agreement.

This is not advice to anyone.