Can I contribute to my Solo 401K because of HCE excessive contribution return in my full-time employer 401K?

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Topic Author
kchnew
Posts: 34
Joined: Wed Dec 13, 2017 11:44 am

Can I contribute to my Solo 401K because of HCE excessive contribution return in my full-time employer 401K?

Post by kchnew » Thu Mar 14, 2019 5:05 pm

I participated in my full-time job employer 401K plan, and contributed the full employee pretax amount $18,500 for 2018. I also have a side self-employed business with an associated Solo 401K.

Last week, my employer 401K plan sent me back about $4,000 of my 2018 employee contribution because the plan failed the Highly Compensated Employee test for 2018, and counted this returned excessive contribution as 2019 income.

However, I do have self-employed income from my side business side, so my question is whether I can make $4,000 employee pretax contribution from my self-employed income to my side business Solo 401K plan to reach the $18,500 limit for year 2018. If yes, my concern is that my 2018 W2 for my full-time job still shows I have contributed $18,500 for 2018, and may trigger IRS letters if I make this $4,000 contribution to my Solo 401K.

My CPA and full-time day job employer 401K plan provider have no clue about this scenario. Just want to see if you have seen this situation before. Maybe I just forget about this to avoid any potential complication.

Thanks a lot!

Spirit Rider
Posts: 11728
Joined: Fri Mar 02, 2007 2:39 pm

Re: Can I contribute to my Solo 401K because of HCE excessive contribution return in my full-time employer 401K?

Post by Spirit Rider » Thu Mar 14, 2019 7:24 pm

kchnew wrote:
Thu Mar 14, 2019 5:05 pm
My CPA and full-time day job employer 401K plan provider have no clue about this scenario. Just want to see if you have seen this situation before. Maybe I just forget about this to avoid any potential complication.
I'm not surprised by the CPA not knowing this, but I am surprised the 401k plan provider does not know this.

Once an employee elective contribution is made. The return of excess contribution due to ADP testing failure does not change the contribution amount. The full amount of the actual contribution must still be considered for purposes of the 402g limit. I.e. You can't put the toothpaste back in the tube.

It may not seem fair, but you can not make any employee elective contribution to your one-participant 401k.

Topic Author
kchnew
Posts: 34
Joined: Wed Dec 13, 2017 11:44 am

Re: Can I contribute to my Solo 401K because of HCE excessive contribution return in my full-time employer 401K?

Post by kchnew » Thu Mar 14, 2019 8:36 pm

Thanks a lot! This makes sense. However, am I still eligible for making after-tax contribution (non-roth) in my one-participant 401k?

Spirit Rider
Posts: 11728
Joined: Fri Mar 02, 2007 2:39 pm

Re: Can I contribute to my Solo 401K because of HCE excessive contribution return in my full-time employer 401K?

Post by Spirit Rider » Thu Mar 14, 2019 9:01 pm

kchnew wrote:
Thu Mar 14, 2019 8:36 pm
Thanks a lot! This makes sense. However, am I still eligible for making after-tax contribution (non-roth) in my one-participant 401k?
Absolutely, only your employee elective contribution limit is restricted. You can make employer contributions and employee after-tax contributions up to the annual addition limit.

I like to remind people, because there is no IRS worksheet for employee after-tax contributions. most people are aware of the statutory annual addition limit (2018 = $55K, 2019 = $56K). Some are aware there is also a 100% of compensation limit.

However, many are not aware that for self-employed individuals, employer contributions reduce compensation. At lower levels of earned income (business profit - 1/2 SE tax), employee after-tax contributions are limited to earned income - employee elective contributions - employer contributions * 2.

Topic Author
kchnew
Posts: 34
Joined: Wed Dec 13, 2017 11:44 am

Re: Can I contribute to my Solo 401K because of HCE excessive contribution return in my full-time employer 401K?

Post by kchnew » Thu Mar 14, 2019 10:17 pm

Spirit Rider, I really appreciate for your reply. Your depth of knowledge on the retirement plans, as other said, is always a true asset to this community.

In my particular case, if I don't do any employer contribution and of course no pretax employee elective contribution, I can contribute the full earned income (assuming under $55k annual limit) into after-tax non-roth account, without affecting my QBI deduction, which should be 20% of the earned income. Just want to clarify.

Spirit Rider
Posts: 11728
Joined: Fri Mar 02, 2007 2:39 pm

Re: Can I contribute to my Solo 401K because of HCE excessive contribution return in my full-time employer 401K?

Post by Spirit Rider » Fri Mar 15, 2019 12:48 am

That is correct. If you are only making employee after-tax contributions. You can contribute up to the lesser of your earned income or $55K for 2018.

If you are not making any pre-tax employee or employer contributions .Your QBI will be your earned income which already has the 1/2 SE tax deducted from it. Minus any SE health insurance deduction.

Topic Author
kchnew
Posts: 34
Joined: Wed Dec 13, 2017 11:44 am

Re: Can I contribute to my Solo 401K because of HCE excessive contribution return in my full-time employer 401K?

Post by kchnew » Fri Mar 15, 2019 10:09 am

Thanks again.

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