Vanguard Solo 401K contributions for single employee S-corp

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
dkoffer
Posts: 35
Joined: Mon Mar 26, 2018 8:41 pm

Vanguard Solo 401K contributions for single employee S-corp

Post by dkoffer »

Hi Folks,

I have been searching online and haven't really found any answers, so I thought I'd post here.

I'm using a Vanguard solo 401K for my single employee S-corp. I'm trying to figure out exactly how much I can contribute on the employer side. Unfortunately, the internet is a bit vague and I see different calculations.

Let's assume for the sake of argument that:

W2 wages are $100K
S-corp health insurance is $10K
Deferred salary is the 2021 max, or $19500

The employer contribution is limited to 25% of the employee's compensation. However, the definition of compensation appears to be somewhat flexible.

One interpretation is that compensation is W2 wages --> $25K employer contribution to the 401K (plus $19.5K deferral)

A second interpretation is that compensation includes all three elements: $100K + $10K + $19.5K = $129.5K --> $32.375K employer contribution to the 401K (plus $19.5K deferral).

I came across https://www.multnomahgroup.com/faq-plan-compensation which suggests that the latter interpretation is correct. Any thoughts here?

Thanks!
User avatar
MP123
Posts: 2285
Joined: Thu Feb 16, 2017 3:32 pm

Re: Vanguard Solo 401K contributions for single employee S-corp

Post by MP123 »

You should consult the Vanguard plan document to see exactly what the definition of compensation is for plan purposes.

My understanding at least for Schwab's i401k is that plan compensation includes W2 box 1 wages (this would include Heath insurance and HSA contributions for >2% S-Corp owners which are properly included in box 1) plus W2 box 12 code D (the elective deferral). So in this case the second interpretation above would be correct.
Topic Author
dkoffer
Posts: 35
Joined: Mon Mar 26, 2018 8:41 pm

Re: Vanguard Solo 401K contributions for single employee S-corp

Post by dkoffer »

The Vanguard plan is a bit dense: information required to be reported under code sections 6041, 6051, 6052. Further defined as wages within the meaning of Code Section 3401(a)...

I'm not entirely sure what it means!
nolesrule
Posts: 2022
Joined: Thu Feb 26, 2015 10:59 am

Re: Vanguard Solo 401K contributions for single employee S-corp

Post by nolesrule »

As a W2 employee of the S Corp your compensation is your salary before any payroll deductions.
nkaufman
Posts: 38
Joined: Wed Feb 27, 2013 5:42 pm

Re: Vanguard Solo 401K contributions for single employee S-corp

Post by nkaufman »

dkoffer wrote: Wed Jul 21, 2021 2:26 pm Hi Folks,

I have been searching online and haven't really found any answers, so I thought I'd post here.

I'm using a Vanguard solo 401K for my single employee S-corp. I'm trying to figure out exactly how much I can contribute on the employer side. Unfortunately, the internet is a bit vague and I see different calculations.

Let's assume for the sake of argument that:

W2 wages are $100K
S-corp health insurance is $10K
Deferred salary is the 2021 max, or $19500

The employer contribution is limited to 25% of the employee's compensation. However, the definition of compensation appears to be somewhat flexible.

One interpretation is that compensation is W2 wages --> $25K employer contribution to the 401K (plus $19.5K deferral)

A second interpretation is that compensation includes all three elements: $100K + $10K + $19.5K = $129.5K --> $32.375K employer contribution to the 401K (plus $19.5K deferral).

I came across https://www.multnomahgroup.com/faq-plan-compensation which suggests that the latter interpretation is correct. Any thoughts here?

Thanks!
When you say W2 wages are 100K and add 19.5K employee deferral then you have to make sure that you ae using the correct terms/numbers. It is
"All income reported in Box 1 of the employee’s Form W-2". Because Box 1 shows amount that has deducted the 19.5K deferral from your gross wages.
Post Reply