topic Partnership 401(K) + S-Corp SEP? in Retirement tax questions

Partnership 401(K) + S-Corp SEP?

dgcoot44 — Sun, 21 Mar 2021 22:49:40 GMT

Person A is sole owner/employee of S-Corp that has been in business as law firm for several years prior to 2020 with a SEP already set up. On 1/1/2020, Person A becomes a partner in a law partnership, Partnership B, and opts to hold partnership interests via the S-Corp. Partnership B makes guaranteed payments to S-Corp, and issues a K-1 to S-Corp for year 2020. S-Corp pays reasonable salary to Person A during 2020 from guaranteed payments income and other S-Corp income (more on this below).

Partnership B has safe harbor 401(k) allowing for elective deferrals by partners up to 19,500 limit.

Can contributions be made to both Partnership B's 401(k) up to elective limit, plus SEP contributions by S-Corp (up to 25% of annual compensation)?

Is the answer any different if a portion of S-Corp's revenue is independent of Partnership B?

-- income not derived from practice of law in 2020

-- income from S-Corp activities prior to 2020.

Thanks in advance for any insight.

Re: Partnership 401(K) + S-Corp SEP?

JeffreyR77 — Sun, 21 Mar 2021 23:50:22 GMT

Yes, contributions to the Partnership B's 401(k) would be allowed from a tax perspective if they are allowed from the Plan administrator.

The S-Corp still has the ability to make contributions up to the lessor of $57,000 or 25% of total compensation.

You do not have the ability to contribute to the S-Corp plan from your reasonable compensation from the S-Corp.

Re: Partnership 401(K) + S-Corp SEP?

dgcoot44 — Mon, 22 Mar 2021 04:05:31 GMT

Thank you for the reply @JeffreyR77 .

When you say:

"The S-Corp still has the ability to make contributions up to the lessor of $57,000 or 25% of total compensation."

Are you saying the S-Corp has ability to to contribute to the 401(k) (subject to that Plan), or rather to the S-Corp's SEP?

Re: Partnership 401(K) + S-Corp SEP?

dmertz — Mon, 22 Mar 2021 12:30:41 GMT

The S-Corp can only contribute to the S-Corp's plan, the SEP plan.

If the S-Corp's share of the partnership was 80% or more, which seems unlikely, I believe that these would be a controlled group required to be treated as a single employer for the purpose of a retirement plan and only one plan would be permitted, which would presumably the 401(k) plan since the 401(k) plan permits both employee and employer contributions.

Re: Partnership 401(K) + S-Corp SEP?

dgcoot44 — Mon, 22 Mar 2021 13:43:58 GMT

Not 80%. Very small ownership % in Partnership B.

Re: Partnership 401(K) + S-Corp SEP?

JeffreyR77 — Mon, 22 Mar 2021 16:37:49 GMT

No, the S-Corp can still contribute to the S-Corp's plan regardless of whether it can contribute to Partnership B's 401(k) plan or not. If contributions are made to Partnership B's 401(k) plan, no contributions via payroll deduction can be made to the S-Corp plan.