Spouse Solo 401K Contributions

[David]

New client has a Solo 401K plan for his SMLLC business. In the past, in addition to the TP, the spouse was allowed to deduct 401K contributions on Form 1040. The spouse is not listed on the Sch C and she isn't paid as an employee. She does work on the company's books.

Is there a reg out there that I am not aware of that allows the spouse to also deduct 401K contributions for the SMLLC business?

Thanks. 

[ILLMAS]

"Although it is called a “Solo” 401k, you can actually set up for you and your spouse.  If you have a bona fide partnership, it would work for them as well. "

I would take a look at the following link:

http://benefitslink.com/m/qa.cgi?db=qa_who_is_employer&n=154

[David]

So the link, as well as other resources I've read appear to say that a spouse can be covered under a SMLLC solo 401K plan only if they work in the business and are either paid through payroll or file a Sch C reporting their portion of LLC profit as a joint venture.

Since the spouse didn't receive a paycheck and didn't file a Sch C as a joint venture should the 2014 tax return not have reported a 401K deduction for her?

I don't see any resource that supports a 401K deduction for a spouse who isn't active in the SMLLC and who isn't subject to the SE tax.

I want to make sure my understanding is correct before I tell the client that they can't take the deduction for the spouse on their 2015 tax return. 

Thanks for your help.

[jklcpa]

The spouse would have to be an employee of the business in order to participate in the plan.

[David]

The spouse does admin and bookkeeping work for the business.

If a Sch C is filed for the spouse (joint venture) splitting the revenue and profits 50%, would this qualify for a spousal 401K?

Does it matter that the LLC is in the husband's name in order to file the joint venture Sch C?

According to the TP, the previous accountant and financial advisor advised that both the TP and spouse are allowed to contribute to the 401K plan. They must know something that I don't know. However, I still don't understand how they could have taken the 401K deductions for both when she wasn't paid from the company nor a separate Sch C was not filed for her as a joint venture.

Thanks for your help.

[jklcpa]

The spouse must have a business relationship with the business in order to contribute to the solo 401k. It can be as wages as an employee, a joint venture reported on Sch C, a partnership, LLC, C or S corp.  The financial advisors are probably saying what they did because they are giving general guidance, because it is possible for a spouse to contribute IF....

With the SMLLC, I think you'd have to look to state law to make sure you don't create problems there.  If this is truly a single member LLC in the husband's name only, it is reported on his Sch C alone. If you have a husband-wife LLC, each being members, the reporting would default to a partnership for unless you are in a community property state. 

Why didn't the husband simply give her a paycheck to solve the problem? 

[David]

The husband was going by the advice given. They maxed out the 2014 401K contributions and are expecting to max out for 2015 and take a $106K deduction.

That would have to be a big paycheck for his wife.

I am surprised that the double max 401K deduction with only 1 Sch C for 2014 didn't generate a letter from the IRS. 

Aren't the H & W allowed to choose to file 2 Sch Cs as a joint venture or a 1065?  I think the tax result and the 401K deductions would be the same.

Thanks. 

 

[jklcpa]

57 minutes ago, David said:

I am surprised that the double max 401K deduction with only 1 Sch C for 2014 didn't generate a letter from the IRS. 

I am too. Give it time, maybe the notice will still come.

 

57 minutes ago, David said:

Aren't the H & W allowed to choose to file 2 Sch Cs as a joint venture or a 1065?

Why are you asking about joint venture since you said this was an SMLLC owned by the husband, meaning he files one Sch C for this business? LLCs are state entities, and a single member LLC owned by an individual is a disregarded entity that reports on one Sch C. For LLCs owned by husband AND wife, reporting depends on whether or not the state is a community property state or not. If not a comm property state, it defaults to a partnership unless it elects to be a C or S corp, and it can NOT elect to be a qualified joint venture. The rev proc mentioned on the IRS page I linked to has special rules for state law entities created in community property states, and it looks like those special rules state that the IRS will go along with H-W LLCs to report as either partnerships or disregarded entities.   See the last section on this IRS page and the Rev Proc here.

 Unless you have an LLC that is truly owned by both the husband and the wife, I don't think you can make a case for the wife having a contributions to the 401K if the LLC is solely owned by the husband and she doesn't have some sort of earned income from the business.

[David]

Thanks for clarifying the joint venture rules. This isn't a community property state so their only choice is to officially add her as a member and file a 1065.

Thanks for your help.

[Lion EA]

Or, hire her as an employee...

[jklcpa]

4 hours ago, Lion EA said:

Or, hire her as an employee...

 

I already suggested and OP replied earlier in the topic:

16 hours ago, David said:

They maxed out the 2014 401K contributions and are expecting to max out for 2015 and take a $106K deduction.

That would have to be a big paycheck for his wife.