Is EE 401k cont. req'd to be guar. pymt?

Partnership has 3 partners and each partner has GP of $200k per P&L. Per review of operating agreement, partnership is not req'd to pay GPs so planning to reclass as much as possible to distributions to increase QBID at individual level. Do partner contributions to 401k have to be included in GP? I see the eligibility to contribute and max contribution is based on self employment income (box 14A). I'm guessing the answer to this question is "yes" but wanted to check with you brilliant people

It need not be in a GP, but it is a distribution to the partner

Thanks CaptCook. I couldn't find anything authoritative to support this assertion other than "guaranteed payments are determined without regard to income of a partnership". Eligibility to make 401k contributions is dependent on a partnership's income and therefore should not be classified as guaranteed payments...true statement? Anyone else have any input?

If you treat the 401k cont as distributions then how would the 401k deduction be reported on Sch K? Ord business income would increase, GP would decrease but would the 401k plan contribution still be reported as other deduction on Sch K and K-1?

Also wondering if employer match contribution has to be classified as GP? Can you classify that as a distribution???

If you treat the 401k cont as distributions then how would the 401k deduction be reported on Sch K?

Code 13R

If you treat the 401k cont as distributions then how would the 401k deduction be reported on Sch K?

Code 13R

I am reporting partner's 401k contributions as such:

$25,000 partner contribution to 401k - distribution rather than GP
$37,000 employer match + profit sharing - distribution rather than GP

Schedule K - Other deduction $62,000
Schedule K-1 13R $62,000

M-1 Deductions on K not charged against books $62,000

My discussed with a co-worker today and he absolutely insisted that this is wrong. He said if I'm taking a deduction on Sch K that I haven't to include it in GP otherwise there is not a corresponding pick up of the GP income on the partner's individual return. Any thoughts on this? I keep going back and forth on this.

Anybody?

Did you get an answer on this? I have not researched it extensively but I can tell you that I have several clients who are partners in a worldwide law firm (believe their work is done by PWC.

On the K-1s they prepare, they show Box 1 Ordinary including all deferrals and/or profit sharing. There is nothing in Box 4, Guaranteed Payments. This firm also has a defined benefit plan. The "gross up" SE income for the DB contribution. Then they report in 13R the full amount contributed for the partner to the defined contribution plan (deferrals + profit sharing) which are then deducted on Page 1 (or wherever they put it now!).

Seems to me they kind of ignore it on the partnership side completely since this is one of those items for which partners are considered self-employed so I think it's kind of like they took money out of their pocket and wrote a check to the plan (like someone could do at filing with a SEP).

They could be doing it wrong but it's at least some idea of how someone else is doing it.

Hope that helps.

I am reporting partner's 401k contributions as such:

$25,000 partner contribution to 401k - distribution rather than GP
$37,000 employer match + profit sharing - distribution rather than GP

I'm trying to wrap my head around this. Are you avoiding any reduction in partnership net income and self-employment income for each of the partners due to the employer match and profit-sharing contributions? That would mean that employer matching contributions for a non-partner employee would create a deduction whereas a matching contribution for a partner would not? This doesn't seem to be correct.

A document recently published by KPMG (https://assets.kpmg/content/dam/kpmg/pd ... 6-2016.pdf) states the following:

Employer contributions to a qualified retirement plan—A partner is
allowed to participate in a qualified retirement plan of the partnership
and allowed to receive “employer” contributions. With regard to
defined contribution plans and most defined benefit plans, any
benefits or accruals on the partner’s behalf are treated as taxable
guaranteed payment income subject to SECA. The partner may
generally take a tax deduction for these contributions to the retirement
plan on the partner’s Form 1040.

Furthermore, there is an example as follows:

B, an individual, owns a 5 percent interest in the profits and losses
of PRS an entity classified as a partnership for federal tax
purposes. PRS operates a law practice with respect to which B, a
licensed attorney, devotes his time and energy. In exchange for
his services, B is paid a “salary” of $400,000.

The “salary” paid to B likely should be characterized as a
guaranteed payment under section 707(c). As such, that payment
should be subject to self-employment tax under section 1402.
B participates in the partnership’s health plan and section 401(k)
plan. The $20,000 health premium paid by the partnership for the
partner is guaranteed payment income subject to SECA. Further,
B contributes $18,000 as an elective contribution to the
section 401(k) plan and receives a 100 percent match (capped at
6 percent of section 401(a)(17) considered compensation of
$265,000, or $15,900). The $15,900 matching contribution is
treated as guaranteed payment income, subject to SECA and then
generally 100 percent deductible.

Thus, B, as a partner, is subject to SECA on its $400,000 “salary”
plus the $35,900 in payments that are made by the partnership for
B’s benefits, but are not excludable from SECA for total income
subject to SECA of $435,900. Thus, B will pay $29,424 in total
SECA tax ($18,130.50 on SECA up to $118,500, $2,363.50 on
amounts between $118,500 and $200,000, and $8,930 on
amounts in excess of $200,000). B can then deduct approximately
$13,668.

How does treating the employer matching and profit sharing distributions as distributions reconcile with the above example?

I am reporting partner's 401k contributions as such:

$25,000 partner contribution to 401k - distribution rather than GP
$37,000 employer match + profit sharing - distribution rather than GP

I'm trying to wrap my head around this. Are you avoiding any reduction in partnership net income and self-employment income for each of the partners due to the employer match and profit-sharing contributions? That would mean that employer matching contributions for a non-partner employee would create a deduction whereas a matching contribution for a partner would not? This doesn't seem to be correct.

A document recently published by KPMG (https://assets.kpmg/content/dam/kpmg/pd ... 6-2016.pdf) states the following:

Employer contributions to a qualified retirement plan—A partner is
allowed to participate in a qualified retirement plan of the partnership
and allowed to receive “employer” contributions. With regard to
defined contribution plans and most defined benefit plans, any
benefits or accruals on the partner’s behalf are treated as taxable
guaranteed payment income subject to SECA. The partner may
generally take a tax deduction for these contributions to the retirement
plan on the partner’s Form 1040.

Furthermore, there is an example as follows:

B, an individual, owns a 5 percent interest in the profits and losses
of PRS an entity classified as a partnership for federal tax
purposes. PRS operates a law practice with respect to which B, a
licensed attorney, devotes his time and energy. In exchange for
his services, B is paid a “salary” of $400,000.

The “salary” paid to B likely should be characterized as a
guaranteed payment under section 707(c). As such, that payment
should be subject to self-employment tax under section 1402.
B participates in the partnership’s health plan and section 401(k)
plan. The $20,000 health premium paid by the partnership for the
partner is guaranteed payment income subject to SECA. Further,
B contributes $18,000 as an elective contribution to the
section 401(k) plan and receives a 100 percent match (capped at
6 percent of section 401(a)(17) considered compensation of
$265,000, or $15,900). The $15,900 matching contribution is
treated as guaranteed payment income, subject to SECA and then
generally 100 percent deductible.

Thus, B, as a partner, is subject to SECA on its $400,000 “salary”
plus the $35,900 in payments that are made by the partnership for
B’s benefits, but are not excludable from SECA for total income
subject to SECA of $435,900. Thus, B will pay $29,424 in total
SECA tax ($18,130.50 on SECA up to $118,500, $2,363.50 on
amounts between $118,500 and $200,000, and $8,930 on
amounts in excess of $200,000). B can then deduct approximately
$13,668.

How does treating the employer matching and profit sharing distributions as distributions reconcile with the above example?

I think maybe the difference lies in how the partner compensation is structured. I think GP's are generally defined as payments for services provided that are not pro-rata to ownership, right? So, in your example above, the partner is paid a $400,000 "salary". I think when the compensation is stated like this in absolute dollars, it is generally not pro-rata to ownership because it is a stated amount. However, if a working partner just gets x% of profits and they are all subject to SE, I don't think that is generally a GP. But, since it is earned income subject to SECA, he can make plan contributions from it.

I think the "employer" piece is only a partnership-level deduction to the extent that it is for actual employees. For partners, it's like they pay the "employer" piece out of their pocket - it is specifically allocated to them so it is not deducted at the partnership level.

Not sure if this helps but if you think about a sole proprietor with a SEP or SIMPLE, you would first figure their net Schedule C income and use that to determine Net SE and thus allowable contribution amount. The full amount of their contribution would be on Page 1 (even if it is partly SIMPLE deferral and part company "match". None of it would reduce their Schedule C profit or Net SE. Because partners are considered self-employed, the treatment I think is intended to be the same. That's my thinking.

Thank you for your response, dbaratz. In a paper called "Let's Look at the Big Picture: Partnership Compensation Issues from the Partnership and Benefits Perspective" published by someone from Deloitte Tax (https://scholarship.law.wm.edu/cgi/view ... ontext=tax), I noted the following (emphasis mine):

The first exception relates to the difference between an exclusion for employees and a contribution with a deduction for self-employed individuals. As with other types of benefits, while contributions to a qualified retirement plan are excluded from income for an employee, they are treated as guaranteed payments on Schedule K-1 for partners, with an offsetting deduction depending on the type of contribution (e.g., 401(k) contribution, matching or profit sharing contribution, or contribution to a defined benefit plan).

Again, where are they getting that contributions to a defined contribution plan made on behalf of partners are to be treated as guaranteed payments? This is a common theme in a number of resources however they all fail to cite a source for this assertion. I'm not sure why this relatively simple question is so difficult to answer (although one might argue that that is the very nature of the tax code!).

Anyway, is there consensus that both the elective deferral contributions and profit-sharing contributions constitute separately-stated items which are NOT deductible to the partnership itself (and NOT necessarily guaranteed payments)?

Furthermore, how are employer matching contributions treated?

Any clarity on this would be greatly appreciated!

Hi all. So sorry I fell off this thread, I hadn't heard back so I decided to just go with my position. The reason why I feel okay sticking with my original position:

1) Operating agreement specifically states that members will not receive a guaranteed payment.
2) There is no reduction to SE income, it's simply a reclass between GP and ordinary.

I saw that KPMG article too and it reallly made me question my position (along with my co-worker's opinion). But like you said, they don't provide a reference to support their position. I feel better considering the information dbaratz provided. I sent the client a draft return already so I'm considering this a done deal.

Thank you for your response, dbaratz. In a paper called "Let's Look at the Big Picture: Partnership Compensation Issues from the Partnership and Benefits Perspective" published by someone from Deloitte Tax (https://scholarship.law.wm.edu/cgi/view ... ontext=tax), I noted the following (emphasis mine):

The first exception relates to the difference between an exclusion for employees and a contribution with a deduction for self-employed individuals. As with other types of benefits, while contributions to a qualified retirement plan are excluded from income for an employee, they are treated as guaranteed payments on Schedule K-1 for partners, with an offsetting deduction depending on the type of contribution (e.g., 401(k) contribution, matching or profit sharing contribution, or contribution to a defined benefit plan).

Again, where are they getting that contributions to a defined contribution plan made on behalf of partners are to be treated as guaranteed payments? This is a common theme in a number of resources however they all fail to cite a source for this assertion. I'm not sure why this relatively simple question is so difficult to answer (although one might argue that that is the very nature of the tax code!).

Anyway, is there consensus that both the elective deferral contributions and profit-sharing contributions constitute separately-stated items which are NOT deductible to the partnership itself (and NOT necessarily guaranteed payments)?

Furthermore, how are employer matching contributions treated?

Any clarity on this would be greatly appreciated!

To answer your question Alex, the consensus is that yes, both elective deferral contributions and profit sharing contributions constitute separately-stated items which are not deductible to the partnership itself. Sounds like the GP versus distribution treatment is up for debate and depends on specific situation.

Thank you for your response -- that does appear to be the proper treatment. Amazing how such a seemingly common everyday thing could be so mysterious.

To follow-up on this discussion:

Fast forward a calendar year and now the client has an employer contribution true up in March 2021 for the 2020 tax year. Historically, I have treated all 401k contributions as distributions to the shareholder. But what do I do now? The 401k deduct belongs on the partner's 2020 individual return but how do I book that in the company's financials? Distribution payable at 12/31/20 (even though they report on the cash basis)? That would be the only way I think...

Yes....payable to the plan at 12/31/20, deduction on the 2020 tax return.

Yes....payable to the plan at 12/31/20, deduction on the 2020 tax return.

ER contributions for shareholder are not deduction for the company. Are you confirming that what I have proposed is correct? (debit owner draw, credit owner draw payable)? There's no other way I can see. Thanks for your thoughts Capt!!

Yes....payable to the plan at 12/31/20, deduction on the 2020 tax return.

ER contributions for shareholder are not deduction for the company. Are you confirming that what I have proposed is correct? (debit owner draw, credit owner draw payable)? There's no other way I can see. Thanks for your thoughts Capt!!

Aren't they shown in Box 13, Code M as a separately stated deduction?

Yes....payable to the plan at 12/31/20, deduction on the 2020 tax return.

ER contributions for shareholder are not deduction for the company. Are you confirming that what I have proposed is correct? (debit owner draw, credit owner draw payable)? There's no other way I can see. Thanks for your thoughts Capt!!

Aren't they shown in Box 13, Code M as a separately stated deduction?

I have historically reported then in 13R. I believe that is correct - - don't have information in front of me confirming.

I have historically reported then in 13R. I believe that is correct - - don't have information in front of me confirming.

That's right....I was working solely from memory.

I have historically reported then in 13R. I believe that is correct - - don't have information in front of me confirming.

That's right....I was working solely from memory.

For the matching contribution ( ie for a 401(K) ) paid in 2021, do you report the full amount on the 2020 k-1 13R?? Accrue it on the 1065? 13R says "payments made". Seems odd to a accrue a distribution. For a solo 401(k) is this necessary??

Box 13 Code R. Pensions and IRAs. Payments
made on your behalf to an IRA, qualified
plan, simplified employee pension (SEP), or
a SIMPLE IRA plan. See the Schedule 1
(Form 1040) instructions for line 19 to figure
your IRA deduction. Enter payments made to
a qualified plan, SEP, or SIMPLE IRA plan
on line 15 of Schedule 1 (Form 1040). If the
payments to a qualified plan were to a
defined benefit plan, the partnership should
give you a statement showing the amount of
the benefit accrued for the current tax year