SEP limit with S Corp owning partnership interest w 401k

Technical topics regarding tax preparation.
#1
IDCPA  
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Taxpayer is 100% S Corp owner. He pays himself $120K of salary each year (no other employees) and makes an annual SEP contribution of $30K.

For 2023 however his revenue stream changed - The S Corp became a 1% partner in a large partnership. The S Corps share of the K-1 income is just a bit larger than in prior years, but $120K is still deemed to be reasonable comp.

The partnership has a 401k plan and the S Corp partner has deferred $22K of it's income into that plan.

So how much can the 100% shareholder contribute to a SEP for 2023? My initial thought is the SEP is a separate plan so he's entitled to contribute the traditional $30K. But I can't help but think the 401k flowing to the S Corp might impact the maximum SEP contribution allowed.

Am I overthinking this?
 

#2
sjrcpa  
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IDCPA wrote:the S Corp partner has deferred $22K of it's income into that plan


???
Do you mean the person that owns the S Corp is also an employee of the partnership and made a salary deferral in the partnership's plan?
 

#3
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I'm a bit confused exactly what happened. A partnership K-1 was received that shows no guaranteed payments, but significant Ordinary business income in Box 1 (this is a group of physicians).

Not included with the K-1 is an "analysis of distribution payments to partners" that includes items like malpractice insurance among other expenses that have come out of the distributions that were paid to S Corp-partner from the partnership. We are deducting items on that list like the malpractice insurance on the S Corp return, as they have not been deducted by the partnership.

But it includes "401k contributions" of $22,500. The S Corp received $22,500 less distribution that was deferred to a 401k. But again the K-1 income has not been reduced and there is no evidence of the deferral on the face of the K-1.

I'm now wondering if perhaps the S Corp is a participating plan under the employer employer in the plan rather, and we should have reported the 401k deferral on their S Corp W-2? The plan is definitely being administered under the partnership though.

For 2024 my client is going back to the old SEP approach under the S Corp and forgoing the 401k altogether just to minimize the confusion. I'm wondering though if they wouldn't be allowed to do both if they so desired? That was my initial question but now I'm just trying to figure out how to report the 401k deferral that was actually made.
 

#4
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I'm confused, too.
I don't see how an S Corporation can have a 401(k) deferral.
Why wouldn't malpractice insurance and other stuff be deducted by the partnership to arrive at Line 1 on the 1065 K-1?
 

#5
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I've requested clarification from the administrator. AS to your 2nd question though, it's more or less an unreimbursed partner expense. They are paying it on behalf of the S Corp. I'm not sure why they are doing that but at least it make sense how to treat it. The 401k on the other hand has me baffled. I'm sure they are trying to fit the square peg 401k in the round holes of S Corp partners but it's causing me a headache trying to decide if they've screwed it up or if I need to figure out how to report it.

The only solution I can come up with is to amend the S Corp W2 to show the deferral to the partnership 401k, but that assumes they were allowed to defer that way, which I'm trying to determine.
 

#6
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You have a conflict between plans. The 401k contribution assumed the partner is an individual, which isn't the case.
It's in error and needs to be fixed.
~Captcook
 

#7
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edit
 

#8
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Doesn't appear go be commonly controlled companies. Are they an affiliated service group? (You can Google)
 

#9
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Yes I would say they are an affiliated Service Group.
 

#10
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Then I would say contributing to both the SEP IRA and the 401k is a problem.
 

#11
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Okay, that makes sense. And they've not done so in the same year so no issues there. I just need to resolve how they are contributing to the 401k at all.
 

#12
eze  
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As soon as you say "Physicians"....it explains a lot. I would agree that this sounds like an error. Is it possible the plan is under the impression that this is an SMLLC instead of an S-Corp. Is the S-Corp name basically the physician's name...adding confusion?

Regarding the Affiliated Service Group, it's a great point. But I think you need more information there. It sounds like this Dr. might working in this medical group, but if he has a separate medical facility, it may not be an Affiliated Service Group. It is common for Dr. to have patients in a group, but have a whole different business outside of the medical group or IPA. For example, they might have a group of patients in the K-1 group that are capitated (monthly fee), but they might have a whole other fee-for-service practice with different patients. Anyway...interesting issue.

IRS Guide here: https://www.irs.gov/pub/irs-tege/epchd704.pdf
 


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