Individual(k)


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The Math - Partnerships

For partnerships, the figures needed to calculate a maximum contribution under an Individual(k) plan are each individual partner's net profits from IRS Form 1065, Schedule K-1 and each partner's self-employment (SE) taxes as determined on IRS Form 1040, Schedule SE. Recall that two components comprise the maximum Individual(k) plan contribution: an employer profit sharing contribution and an employee salary deferral contribution.

Once the net profit and SE tax figures are determined (or estimated in the case of advance planning), the maximum Individual(k) plan contribution for each partner may be calculated as follows.

Step 1: Determine Modified Net Profit.*

Modified Net Profit* = Net Profits - ½ SE Tax

Step 2: Determine Maximum Salary Deferral

Maximum Salary Deferral = Lesser of Annual Maximum Deferral Limit, plus Catch-Up Contributions, if eligible*** or Modified Net Profit

Step 3: Determine Maximum Profit Sharing Contribution.

Maximum Profit Sharing Contribution = .25 x (Modified Net Profit / 1.25)

Step 4: Calculate Maximum Individual(k) Contribution

Maximum Individual(k) Contribution = Maximum Salary Deferral + Maximum Profit Sharing Contribution
Note: The maximum Individual(k) Plan contribution cannot exceed 100% of the business owner's Adjusted Net Business Income (ANBI). ANBI = Modified Net Profit - Profit Sharing Contribution.

*For 2010, the maximum amount of Modified Net Profit that may be used for determining plan contributions is $245,000.

**Assuming a pro rata allocation formula, each partner in a partnership must generally receive the same level of employer profit sharing contribution when expressed as a percentage of his or her modified net profit.

***Individuals who are age 50 during the year are eligible for an additional catch-up contribution. For 2010, the annual maximum deferral limit is $16,500 and the catch-up limit is $5,500.

Example:

Laura Johnson and Bob Anderson are equal partners in Acme Consulting. Each has a 50% profit interest in the partnership. For 2010, Laura and Bob's accountant has estimated the partnership will have profits of approximately $300,000. Based on this estimated number and estimated self-employment taxes for each partner for 2010 of $16,108, the maximum contribution that could be made to an Individual(k) plan for Acme Consulting on behalf of each partner can be determined as follows.

Note: Because Laura and Bob have an equal profit interest in the partnership, their respective "compensation" for Individual(k) plan purposes will be equivalent.

Step 1: Determine Modified Net Profit

Modified Net Profit = $150,000 - .5($16,108)

Modified Net Profit = $150,000 - $8,054

Modified Net Profit = $141,946

Step 2: Determine Maximum Salary Deferral

Maximum Salary Deferral = Lesser of $16,500 (plus catch-up contribution, if eligible) or Modified Net Profit

Maximum Salary Deferral = Lesser of $16,500 or $141,946

Maximum Salary Deferral = $16,500

Step 3: Determine Maximum Profit Sharing Contribution

Maximum Profit Sharing Contribution= .25 x (Modified Net Profit / 1.25)

Maximum Profit Sharing Contribution= .25 x ($141,946 / 1.25)

Maximum Profit Sharing Contribution = $28,389

Step 4: Calculate Maximum Individual(k) Plan Contribution

Max. Individual(k) Plan Contribution = Max. Salary Deferral + Max. Profit Sharing Contribution

Max. Deferral + Profit Sharing Contribution = $16,500 + $28,389 = $44,889

Max. Individual(k) Plan Contribution = $49,000 (capped at lesser of 100% of compensation or $49,000)

Based on estimated profits for the partnership of $300,000 for 2010, both Laura and Bob could receive allocations under an Individual(k) plan of as much as $49,000. If either Bob or Laura were age 50 or older in 2010, they would be eligible for an additional catch-up contribution of $5,500 in the form of a salary deferral contribution, bringing their individual maximum contribution up to as much as $54,500.