Hello,

I have a client, husband and wife. Husband is 80% owner of partnership, wife is employee.  They contributed to the company 401K for 2023 but did failed the compliance testing for the Actual Deferral Percentage test.  Now, in 2024, there will be a refund to each of them for excess contributions.

I prepare the partnership return.  I’m unsure with how to proceed with finalizing the partner K-1 for 2023. My question is, can I reduce the 401k contribution on his K-1 to match the reduced amount showing the excess as a guaranteed payment other than 401K and have her amend her W2 to be taxed on the excess amount?  Then, in 2024 when the 1099R arrives only include the excess income earned as taxable?

Would this be the appropriate treatment or am I missing something? Would I need to use any special tax forms to report basis?  Please advise.