Expert: Allen - 3/8/2011

Question
My wife has participated in her law firms's 401k plan as a W-2 employee for 10 years. In 2010 she became a capital partner and her income is reported via 1099.
She continues to participate in the 401k plan.
Can she establish an individual 401k and take advantage of the higher contribution limits while remaining in the current plan? Contributing $22,000 in the 401k and an additional $32,000 in the individual 401K.

Answer
Normally income for a partner is reported on a K-1 rather than a 1099. The 1099 would be used when the individual has no ownership interest in the law firm and is being treated as an independent contractor. Please clarify what her relationship is to the law firm.

In most cases, if she is a partner she can not set up her own plan. On the other hand, if she is an independent contractor with no ownership in the law firm, she probably can set up her own plan. The fact that she is continuing to participate in the law firm's plan leads me to believe she is NOT an independent contractor. The only correct way an independent contractor can participate in the law firm's plan is if the individual adopted the law firm's plan for it's employees and owners.