Solo 401k contribution limits (CPA confused! So I am too help)

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Topic Author
Petra
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Solo 401k contribution limits (CPA confused! So I am too help)

Post by Petra »

I have an Scorp, for which my husband and I are employees and I've newly have setup a solo 401k with Vanguard for each of us. My husband's w-2 income was reported on line 1 as $1,988.09. Employee contribution, indicated on line 12a, was $24,000 (he is over 50). Social security withheld (line 4) was $1,611.26 and Medicare withheld (line 6) was $376.83. Social Security & Medicaid wages (line 3 and 5) were reported as $25,988.
The employer contribution is 25%. What should the employer contribution be for him?
A- Should it be 25% of his salary which is $6497 as indicated by this IRS source: https://www.irs.gov/retirement-plans/on ... 401k-plans
B- or should the combined employer/employee contributions be capped at 100% - based on this IRS link: https://www.irs.gov/retirement-plans/40 ... nual-limit
C- And if the above should the contribution be $1000 or $1,988.09?
I have one accountant saying A and the other saying B. Help!
Addendum: I just spoke to the IRS who agreed that the publications seem to be contradictory and "they don't provide the information I am seeking. Keep a copy of the publication to explain why I did what I did so if I get hit I can explain my reasoning."
Last edited by Petra on Tue Jul 18, 2017 2:15 pm, edited 1 time in total.
Spirit Rider
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Spirit Rider »

It is a little tricky, so this is probably why one CPA got this wrong,

For a W-2 employee the maximum employer contribution is 25% of their compensation. Your husband's compensation would be $25,988. So the nominal maximum calculated employer contribution $25,998 * 0.25 = $6,497.

26 U.S. Code Section 415c further limits the annual additions (employee + employer contributions) to the lesser of (A) 100% of compensation and (B) $54K in 2017. However, the annual addition limit does not include catch-up contributions.

Since $25,998 - $18,000 = $7,988 >= $6,497, the maximum employer contribution = $6,497.
aristotelian
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by aristotelian »

I just use one of the calculators on bankrate
Com or mysolo401k.com
Topic Author
Petra
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Petra »

But spirit rider since I've already made the salary deferral of $24,000, if the cap is employer + employee wouldn't that make $6497 over the cap?
Topic Author
Petra
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Petra »

aristotelian I checked out the calculator at mysolo401k.org. We are married joint owners of an scorp with no employees so I'm wondering if single owner corporation is the correct category? (the only other category was unincorporated sole proprietorship). When I plugged in the numbers, it gave me $1,988.

Any thoughts?
Spirit Rider
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Spirit Rider »

Petra wrote:But spirit rider since I've already made the salary deferral of $24,000, if the cap is employer + employee wouldn't that make $6497 over the cap?
You have not made a $24,000 employee deferral. You have made an $18,000 employee deferral and a $6,000 employee catch-up.

The $6,000 catch-up contribution is not included in the annual limit, only the $18,000 employee deferral and in this case the employer contribution. Therefore, $18,000 + $6,497 = $24,497 <= $25,988 and you can still do the catch-up contribution.
Topic Author
Petra
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Petra »

Spirit Rider that is very tricky! It does not reflect on any of the calculators (including bankrate which also spits out $1988) but I see your reasoning here! If this is the case I bet many are calculating incorrectly.

(as an aside I do hate the idea of not being able to trust the calculators!)
Spirit Rider
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Spirit Rider »

Petra wrote:Spirit Rider that is very tricky! It does not reflect on any of the calculators (including bankrate which also spits out $1988) but I see your reasoning here! If this is the case I bet many are calculating incorrectly.

(as an aside I do hate the idea of not being able to trust the calculators!)
I have repeatedly cautioned against using online calculators for retirement plan contributions. They very often fail in these boundary conditions It appears that both bankrate.com and mysolo401k.org use the same engine and are both incorrect. They limit the catch-up contribution to not exceed compensation. I repeat this is incorrect.

I will give you another situation that demonstrates that the annual addition limits do not include catch-up contributions. The total maximum contribution limit for 2017. However, with W-2 compensation of $144K, the maximum employer contribution = $36K.

The $18,000 employee deferral + $36,000 employee deferral = $54K, within the 2017 415c annual limit. Then you can make the $6,000 catch-up contribution for a total of $60,000

The two referenced calculators get this one right.
Topic Author
Petra
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Petra »

Do you know of any publications that I can cite that say the catch up contribution is not included in the cap/limit? (the IRS says citing a publication goes a long way!)
Spirit Rider
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Spirit Rider »

I am going to put a caution to wait for verification of my statements on the application of the 415(c)(A) 100% compensation and 415(c)(B) 2017 = $54K.
Topic Author
Petra
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Petra »

Spirit Rider I like your demonstration of the 144,000 calculation.
Topic Author
Petra
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Petra »

Page 2 of Vanguard's iSolo401k plan kit: The total amount contributed (by employer and employee) can’t exceed the annual additions limit ($53,000 for 2016; $59,000 for participants age 50 or older using the catch-up contribution) or 100% of compensation.

So Spirit Rider VG literature does not outline the exclusion of the $6,000 catch up. I'm on the phone with them now, but I doubt it will be resolved since they will be sourcing the same IRS publications that I have which don't specify!
Topic Author
Petra
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Petra »

Adding a very naive comment here but it feels like the $6,000 catch up should not be included, as it would negate the catch up for those that need it most.
Topic Author
Petra
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Petra »

On the phone with Vanguard Retirement Administrator, who knocked the question up the food chain and they are so far stumped. If the IRS and Vanguard can't confirm either way, who can? (as I shout into an empty void and hear an echo...). But I cracked him up when I said this is the Twin Peaks of IRS tax code.

Any other feedback folks do chime in!
Spirit Rider
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Spirit Rider »

Sorry if this is rather long and involved, but it is very often necessary when finding the correct answers.

Ok, so here are what I believe are references to this issue. First, the catchup contribution itself is limited by the employee deferral + catchup contribution not exceeding compensation. Which has not occurred here, $18K + $6,000 = $24,000 is not > $25,988. Second, The 415c annual limits do NOT apply to catchup contributions.

Publication 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), Chapter 4, Page 16, Limit on Elective Deferrals:
However, the catch­up contribution a participant can make for a year can't exceed the lesser of the following amounts.
  • The catch­up contribution limit.
  • The excess of the participant's compensation over the elective deferrals that aren't catch­up contributions.
Publication 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), Chapter 4, Page 15, Limits on Contributions
and Benefits:

Defined contribution plan. For 2016, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant can't exceed the lesser of the following amounts.
  1. 100% of the participant's compensation.
  2. $53,000 ($54,000 for 2017).
    Catch­up contributions (discussed later under Limit on Elective Deferrals) aren't subject to the above limit.
Then the actual references in the IRC.

26 U.S. Code Section 414 - Definitions and special rules, (v) Catch-up contributions for individuals age 50 or over
  1. In general An applicable employer plan shall not be treated as failing to meet any requirement of this title solely because the plan permits an eligible participant to make additional elective deferrals in any plan year.
  2. Limitation on amount of additional deferrals,
    1. In general A plan shall not permit additional elective deferrals under paragraph (1) for any year in an amount greater than the lesser of—
      1. the applicable dollar amount, or
      2. the excess (if any) of—
        1. the participant’s compensation (as defined in section 415(c)(3)) for the year, over
        2. any other elective deferrals of the participant for such year which are made without regard to this subsection.
  3. Treatment of contributions In the case of any contribution to a plan under paragraph (1)—
    1. such contribution shall not, with respect to the year in which the contribution is made—
      1. be subject to any otherwise applicable limitation contained in sections 401(a)(30), 402(h), 403(b), 408, 415(c), and 457(b)(2) (determined without regard to section 457(b)(3)), or
      2. be taken into account in applying such limitations to other contributions or benefits under such plan or any other such plan
Spirit Rider
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Spirit Rider »

Petra wrote:Page 2 of Vanguard's iSolo401k plan kit: The total amount contributed (by employer and employee) can’t exceed the annual additions limit ($53,000 for 2016; $59,000 for participants age 50 or older using the catch-up contribution) or 100% of compensation.

So Spirit Rider VG literature does not outline the exclusion of the $6,000 catch up. I'm on the phone with them now, but I doubt it will be resolved since they will be sourcing the same IRS publications that I have which don't specify!
I just noticed this post.

Actually, VG does outline the exclusion of the $6,000, they just word it poorly. They are kind of implying that the annual limit increases for those >= age 50, which is not true. The 2016 annual additions limit for 2016 was $53,000 and participants >= age 50 could make an additional $6,000 catch-up contribution not included in the limit for a total of $59,000.
Topic Author
Petra
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Petra »

Spirit Rider can you post a link to the IRC on that section?
Spirit Rider
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Spirit Rider »

Petra wrote:Spirit Rider can you post a link to the IRC on that section?
Publication 560 Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) Search for Limits on Contributions and Benefits, Chapter 4, Page 15.

26 U.S. Code § 415 - Limitations on benefits and contribution under qualified plans This is the entire Section 415, search for subsection (c) Limitation for defined contribution plans, about 40% of the way down.
harvestbook
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by harvestbook »

Similar situation, in my first year of solo 401k with wife as employee. We are maxing out our employee deferrals ($24K for me including the over-50 catch-up of $6000, and $18K for my wife.) We will also make employer contribution of $6000 for me and $4500 for her.

My understanding via the accountant is I will also be eligible for a 25 percent employer match on my Box 1 compensation for health insurance (reimbursed by the corporation.) I am waiting until year end to calculate that, and there may be some leeway on W-2 income. The goal is to max out the basic limits on each month's payroll and then fine-tune when we have the year-end totals and/or W-2.

Not much to add, really, except any Box 1 compensation is eligible for a 25 percent employer match (but not an employee deferral, to my understanding.) Good luck.
I'm not smart enough to know, and I can't afford to guess.
Spirit Rider
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Re: Solo 401k contribution limits (CPA confused! So I am too help)

Post by Spirit Rider »

harvestbook wrote:Not much to add, really, except any Box 1 compensation is eligible for a 25 percent employer match (but not an employee deferral, to my understanding.) Good luck.
Actually, both one-participant 401k employee deferrals and employer contributions are based on total compensation. For an S-Corp shareholder-employee, total compensation includes health insurance premiums and optionally HSA contributions paid and deducted by the S-Corp.

Another way of looking at this is that total compensation = W-2 Box 1 Wages + pre-tax employee deferrals. This is the amount eligible for the 25% employer contribution
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