We are a small company with 7 total people. The partners have not historically drawn a salary and would like to participate in our safe harbor 401k plan. Can they do this without drawing a salary and getting a W-2?
Yes. See Treas. Reg. Section 1.401(k)-1(a)(6), at p. 399 here: http://www.irs.gov/pub/irs-irbs/irb05-05.pdf
Thank you very helpful. Anything I should document for internal records? For avoidance of doubt, we have profits in excess of the contribution. I appears as though the contribution will show up on line 28 of the partners form 1040. Where does this amount show up on the form K-1? Is the amount considered a guaranteed payment? Sorry for getting technical.
Your TPA or CPA should be able to answer your questions. If you don't have a TPA, get one. No company should handle a qualifed plan on its own, there are too many traps. And if your CPA does not know how to handle partnership income in a plan (see 'Earned Income' for crying out loud) get a new CPA. Same goes for the TPA - if you have one and they can't answer your questions, fire them.
And who is making sure your document is up to date with all amendments?
And who is making sure your document is up to date with all amendments?
QUOTE (rcline46 @ Sep 9 2009, 06:20 AM) 
Your TPA or CPA should be able to answer your questions. If you don't have a TPA, get one. No company should handle a qualifed plan on its own, there are too many traps. And if your CPA does not know how to handle partnership income in a plan (see 'Earned Income' for crying out loud) get a new CPA. Same goes for the TPA - if you have one and they can't answer your questions, fire them.
And who is making sure your document is up to date with all amendments?
And who is making sure your document is up to date with all amendments?
We use a third party benefits provider to maintain our documentation and amendments. I am not concerned about the documentation on the plan. I am trying to understand how the information will be reported to the partners, what the correct process is and what I should watch for as our paid prepares / administrator generate reports and give us advice. I believe in doing things right up front and not fixing them after the fact.
Thank you for your replies, very helpful.
QUOTE (Sieve @ Sep 8 2009, 04:44 PM)
Yes. See Treas. Reg. Section 1.401(k)-1(a)(6), at p. 399 here: http://www.irs.gov/pub/irs-irbs/irb05-05.pdf
Minor point: the question in the title and the question in the original post are opposites.
Actually, that's probably more than a minor point. Lest anyone be confused, the answer to the question in the body of the OP is Yes, and to the title of the post it's No.
QUOTE (longterminvestor @ Sep 8 2009, 03:19 PM)
Thank you very helpful. Anything I should document for internal records? For avoidance of doubt, we have profits in excess of the contribution. I appears as though the contribution will show up on line 28 of the partners form 1040. Where does this amount show up on the form K-1? Is the amount considered a guaranteed payment? Sorry for getting technical.
The 401(k) contribution would only be a guaranteed payment if it were a deferral from a guaranteed payment, I believe. There's no requirement to have guaranteed payments if a partner wants to contribute to a plan based on his or her "earned income." But to second the consensus of the other posters: benefits administration is tricky; pass-through taxation is really hard. Leave the K-1's to a CPA with some experience with partnerships.
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