The law firm of Smith & Wesson consists of two equity partners (Smith and Wesson--each 50% equity partners). Smith and Wesson are also each 50% profits partners. The firm also pays two lawyers as common law employees (W-2) and two lawyers as "partners" (K-1). There are, of course, a couple of support staff too.

The two lawyers treated as partners are paid via K-1 because what they get paid is based directly on what they generate. My question is whether someone can properly be a partner if they have no equity and no profits interest in the partnership?

A review of web articles reveals that "non-equity partners" are becoming increasingly common in law firms.

Page 6 of this article describes your basic scenario of a non-equity partner receiving guaranteed payment for services rendered to the partnership which are then reported on Sch K-1.

Thanks, that was very helpful.

Assume an individual receives a K-1 only for guaranteed payments ($100,000) and is entitled to a 3% of pay safe harbor 401(k) contribution. Does she get $3,000 ($100,000 times 3%) or $2,913 ($100,000 times 2.91262%)?

Trick question? Or are you assuming that this individual had a W-2 for the SSWB from another employer? K-1 income is earned income. As such, you reduce it by the 1/2 FICA reduction, don't you? And, yes, you further reduce it by the deferral, I believe, so the non-integral percentage was closer to right than the 3%. Or did you factor in the 1/2 FICA reduction?

Good point, Mike--the $100,000 would also need to be adjusted for the 1/2 SET, if it hadn't already been adjusted.

I have yet another question. Assume the partnership had income after all expenses except retirement plan contributions and the K-1 guaranteed payments of $700,000. Further assume that there are 3 partners--P1 has a 50% equity & 50% profits interest in the firm; P2 also has a 50% equity and 50% profits interest in the firm; P3 has neither an equity nor a profits interest--he is just paid via a K-1.

Sal Tripodi writes in his ERISA Outline Book (see page 1.130 of 2004 edition) that "guaranteed payments are treated as part of the partner’s distributable share of partnership income." If P1 and P2 take guaranteed payments of $300,000 each that leaves $100,000 in firm revenue. P3 is paid guaranteed payments of $80,000. The remaining $20,000 will be allocated as a profit sharing contribution.

Is P3 an HCE by virtue of ownership? If, as Sal Tripodi claims, guaranteed payments are treated as part of a partner's distributable share of partnership income, then P1 and P2 are each 5% owners since they each received roughly 43% of the firm's income ($300,000 each divided by $700,000--ignore the retirement plan contribution). Is P3 an HCE too? P3 received roughly 11.5% of the firm's income despite the fact he has neither an equity interest nor a profits interest in the firm. Since 11.5% is "more than 5%", is P3 a 5% owner too?

Thanks in advance for any suggestions/help.

I treat non-equity partners as HCE's in the vast majority of cases. Of course, usually their compensation is alone enough to ensure they are HCE's. But in that rare case where the compensation would be beneath the threshold you do the calculation you mentioned and if it is greater than 5% then they are an HCE. At least, that is the way that I *think* I've been doing it.

Thanks, Mike. That helps a lot.