Is it true or false that shareholders of S-corps can have both W-2 and K-1 compensation counted for plan purposes?

The statement is false because S-corporation shareholders are typically compensated through distributions reported on Schedule K-1 rather than through wages reported on a W-2 for purposes of qualified retirement plans like a 401(k).

For a shareholder in an S-corp, their income from the corporation is generally reflected in two ways: as wages (reported on W-2) and as dividends or distributions (reported on a K-1). However, only the compensation reported as W-2 wages can be considered as eligible compensation when calculating contributions and benefits under a 401(k) plan. K-1 distributions do not classify as earned income for these purposes and therefore do not count towards deferrals, contributions, or any other calculations related to the qualified plan.

This distinction ensures that the plan adheres to IRS regulations regarding allowable compensation for contribution purposes. Thus, only W-2 income is included for 401(k) plan participation, leaving K-1 income excluded from such calculations.