HPI and lowering S-corp owner's W-2 compensation

An accountant is asking if he can just lower the W-2 compensation of the S-corp owner so that it's below the HPI threshold and that gets the owner out of the new Roth catchup rule.  Can they shift more income to the dividend K-1 and avoid the issue that simply?  Sure, it lowers their overall employer benefit, but I suspect some will find that a fair trade-off.  Thanks.

The definition of HPI stands as is, and the plan should follow the rules.  It is between the accountant and the owner on how the owner's income is characterized as W-2 or dividends.  You don't want to hear later that the IRS is challenging the reporting of income as tax avoidance and the client and accountant say they did what you told them to do.

If the accountant is a member of the American Institute of Certified Public Accountants or is a licensee of a State that adopts the AICPA professional-conduct rules and standards as the State’s rules:

“[A] member [or a licensee] should not advise a taxpayer to take a tax position unless the [CPA] has a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits, if challenged.”

The standard is not about whether the IRS would fail to detect the pushy position. Rather, the standard looks toward the merits (and pretends the decision-maker would find facts and law fairly and justly).

If a shareholder-employee is 49 or older and has two decades’ (or more) business or professional experience, how likely could she defend that the fair-market value of her personal services was only $150,000?

This is not advice to anyone.

Both Paul I and Peter are giving you the proper framework. Please be cautious. A third-party administrator should not be giving "advice" on how a client allocates income between the K-1 and W-2. Only the accountant or the client's tax/legal advisor should opine on that and in each case, they are constrained by their own standards of practice. 

15 minutes ago, FORMER ESQ. said:

Both Paul I and Peter are giving you the proper framework. Please be cautious. A third-party administrator should not be giving "advice" on how a client allocates income between the K-1 and W-2. Only the accountant or the client's tax/legal advisor should opine on that and in each case, they are constrained by their own standards of practice. 

100% - I am not advising them.  I'm answering strictly that the rules say if FICA comp is over some number, then the rules kick in.  I don't discuss how the W-2 compensation is determined.

12 hours ago, Peter Gulia said:

If a shareholder-employee is 49 or older and has two decades’ (or more) business or professional experience, how likely could she defend that the fair-market value of her personal services was only $150,000?

 

This is adorable.

I did see some accountants take this approach in 2025 to keep the comp below the limit to avoid the ROTH in 2026.  For an owner only plan it has no effect on the amount the owner can get in the plan. If there are employees, and cross tested, then there may be higher contributions required for the NHCE's.