Funding 401(k)/profit sharing with K-1 Income
Hello All,
A business owner and his wife have a 401(k) profit sharing plan with 3 full time employees who are eligible for the 401(k) plan. The three employees are W-2 employees. The owner and his wife do not have W-2 Income but rather take out K-1 distributions quarterly.
1) Can the business owner and his wife make 401(k) contributions with all or part of their K-1 income?
2) Can the business owner match his and his wife’s 401(k) contributions (made with K-1 income) with pre-tax, business tax deductible, dollars?
3) Are there any limitations to the business owner’s profit sharing contribution capabilities if his income is all K-1 income. For example, if he drew $50K for himself and $50K for his wife, can he use $50k as the income figure for a new comparability or integrated profit sharing calculation?
Best Regards,
Khalil
Permalink Submitted by mk foss on Mon, 2012-02-20 19:18
You didn’t indicate what kind of entity the business operates as. If it is an S corporation, salaries are needed to support 401k contributions. The owner and spouse would be treated just like any other employee. If this is an LLC, or partnership and there is SE income reported on the Schedule K-1, the SE income is used to determine 401k contributions. The owner and spouse cannot contribute a higher percentage to the plan for themselves than they do for the employees.
They really need a TPA (Third Party Administrator) when operating a 401k plan with employees other than owners. There are testing rules and safe harbors that need attention to determine the maximum contribution.
Permalink Submitted by Michael Bekiarian on Mon, 2012-04-23 13:45
We have an LLC with 4 partners who all receive K1 distributions. There are 15 employees within the LLC that receive W2 income and participate in the 401K plan. Can the member of the LLC make contributions to the 401K as the same as W2 employees within IRS guidelines? Can the company Match those contributions and how are they classified? I have read that the matching contributions are not considered matching for members but are considered deferred contribution – is that accurate? We are considered a partnership for tax purposes.
Permalink Submitted by mk foss on Mon, 2012-04-23 22:08
The members of the LLC can make 401(k) deferrals during the year the same as the employees – with the usual overall limits.
The partnership can (and should) match the partner’s deferrals as well.
The partnership cannot discriminate in favor of the partners or higher paid – the same percentage match is needed for all.
The employees defer a percentage of their gross income – the highest dollar amount is the same for partners and employees – it was $49,000 for 2011/$50,000 for 2012.
The overall deduction for the employer is a maximum of 25% of salaries but the deduction for the partners is claimed on their individual returns and is 25% net of 25% – which works out to be 20% of earnings reduced by the SE tax deducted on page 1 of the return.