Max contributions for K1 partners

In a discussion with a CPA who says a partner who receives a K1 cannot exceed the 2019 limit of $56,000--that catch up contributions never come into play because they have no salary from which to defer. Can anyone point me to IRS rules that dispute this?

Is the CPA using the same logic to argue that partners can't defer at all?

The first ones that come to mind are 1.401(k)-1(a)(6), "Rules applicable to cash or deferred arrangements of self-employed individuals" and the universal availability requirement for catch-up contributions in 1.414(v)-1(e) that would be violated if catch-up eligible partners are not allowed to make catch-up contributions. 

A more amusing approach would be to ask the CPA to provide cites supporting his claim.

1 minute ago, duckthing said:

Is the CPA using the same logic to argue that partners can't defer at all?

I believe he is!

1 minute ago, Kevin C said:

The first ones that come to mind are 1.401(k)-1(a)(6), "Rules applicable to cash or deferred arrangements of self-employed individuals" and the universal availability requirement for catch-up contributions in 1.414(v)-1(e) that would be violated if partners are not allowed to make catch-up contributions. 

A more amusing approach would be to ask the CPA to provide cites supporting his claim.

He cannot provide cites.  Of course.

1 hour ago, ratherbereading said:

I believe he is!

Well, then he's clearly incompetent and the client needs to find a new CPA.  Meanwhile, here's some "stuff" to throw at him from the Erisa Outline Book:

SELF-EMPLOYED INDIVIDUAL

An individual who has earned income (see the earned income definition in Chapter 1A) from the employer who maintains the plan. See IRC §401(c)(1)(B). A qualified plan may cover the self-employed individual, as if that individual were an employee. IRC §401(c)(1)(A). If the employer is a sole proprietorship, the sole proprietor is the only self-employed individual with respect to that employer. If the employer is a partnership, the partners who derive earned income from the partnership are the self-employed individuals with respect to that employer. Note that not all partners will necessarily have earned income. Earned income, as defined in IRC §401(c)(2), is based on net earnings from self-employment, so the partner has to be provided personal services to the partnership. For example, a limited partner might not be deriving any earned income from the partnership. A separate definition of earned income is provided in Chapter 1A. The term "self-employed individual" presumably applies to the owners of any entity that is taxed as a sole proprietorship or partnership for Federal tax purposes (e.g., owners of a limited liability company).

and this...

3. Effect of 401k deferrals on the self-employed individual’s earned income. Since the employer takes a deduction under IRC §404 for elective deferrals made under a section 401(k) arrangement, and IRC §401(c)(2)(A)(v) requires earned income to be determined “with regard to the deductions allowed by” IRC §404, a self-employed individual’s earned income taken into account for allocation purposes normally reflects the reduction for the individual’s elective deferrals under a section 401(k) plan. However, a plan might “gross up” for elective deferrals in calculating compensation used to allocate employer contributions, particularly in light of the fact that “gross” compensation is the compensation used for purposes of calculating the IRC §415 limit (even for self-employed individuals) and many plans define compensation for allocation purposes as section 415 compensation. For example, if the profit sharing plan in the example in 1.a. above used section 415 compensation to perform the allocation, and the plan (or a separate plan maintained by the employer) included a 401(k) arrangement, Anna’s earned income would be increased by the amount of her elective deferrals under the 401(k) arrangement. However, any portion of the IRC §404 deduction that reflects other contributions made to the plan (e.g., employer matching contributions or nonelective contributions), or that reflects the elective deferrals of the other employees, would still be deducted in determining Anna’s earned income for allocation purposes, pursuant to the adjustment required by IRC §401(c)(2)(A)(v).

15 hours ago, Larry Starr said:

Well, then he's clearly incompetent and the client needs to find a new CPA.  Meanwhile, here's some "stuff" to throw at him from the Erisa Outline Book:

SELF-EMPLOYED INDIVIDUAL

An individual who has earned income (see the earned income definition in Chapter 1A) from the employer who maintains the plan. See IRC §401(c)(1)(B). A qualified plan may cover the self-employed individual, as if that individual were an employee. IRC §401(c)(1)(A). If the employer is a sole proprietorship, the sole proprietor is the only self-employed individual with respect to that employer. If the employer is a partnership, the partners who derive earned income from the partnership are the self-employed individuals with respect to that employer. Note that not all partners will necessarily have earned income. Earned income, as defined in IRC §401(c)(2), is based on net earnings from self-employment, so the partner has to be provided personal services to the partnership. For example, a limited partner might not be deriving any earned income from the partnership. A separate definition of earned income is provided in Chapter 1A. The term "self-employed individual" presumably applies to the owners of any entity that is taxed as a sole proprietorship or partnership for Federal tax purposes (e.g., owners of a limited liability company).

and this...

 

3. Effect of 401k deferrals on the self-employed individual’s earned income. Since the employer takes a deduction under IRC §404 for elective deferrals made under a section 401(k) arrangement, and IRC §401(c)(2)(A)(v) requires earned income to be determined “with regard to the deductions allowed by” IRC §404, a self-employed individual’s earned income taken into account for allocation purposes normally reflects the reduction for the individual’s elective deferrals under a section 401(k) plan. However, a plan might “gross up” for elective deferrals in calculating compensation used to allocate employer contributions, particularly in light of the fact that “gross” compensation is the compensation used for purposes of calculating the IRC §415 limit (even for self-employed individuals) and many plans define compensation for allocation purposes as section 415 compensation. For example, if the profit sharing plan in the example in 1.a. above used section 415 compensation to perform the allocation, and the plan (or a separate plan maintained by the employer) included a 401(k) arrangement, Anna’s earned income would be increased by the amount of her elective deferrals under the 401(k) arrangement. However, any portion of the IRC §404 deduction that reflects other contributions made to the plan (e.g., employer matching contributions or nonelective contributions), or that reflects the elective deferrals of the other employees, would still be deducted in determining Anna’s earned income for allocation purposes, pursuant to the adjustment required by IRC §401(c)(2)(A)(v).

Thanks Larry!

The other potential source of this "uneducated" opinion sometimes comes from someone being dangerous enough to read the plan document and seeing "W-2 income" elected, and not knowing that the definition also includes earned income.  FWIW

1.414(v)-1(g)(3): "catch-up eligible participant" = "employee," blah blah

1.414(v)-1(g)(4): "employee" defined in 1.410(b)-9

1.410(b)-9, definition of "Employee": "...individual who performs services...who is either a common law employee...a self-employed person...treated as an employee pursuant to section 401(c)(1), or a leased employee..." (emphasis supplied).