Does SEHID Reduce Sole Proprietor Solo 401(k) Contribution Basis?

[GoldenBear17]

I see a few threads touching on this and I think I even posted one of them myself before. Yet I’m still confused.

Say you run a sole proprietorship and file Schedule C. The compensation to base Solo 401(k) contributions on is net Schedule C profit (Line 31) minus the deductible half of Self-Employment Tax.

So if the net profit on Schedule C, Line 31 is $50,000, SE Tax is $7065, and half of SE Tax is $3533. So the compensation to base Solo 401(k) contributions on is $46,467 ($50,000-$3533).

In other words, this person qualifies to contribute $46,467 (100% of net business profit minus half of SE Tax) to a Solo 401(k) Voluntary After-Tax account for a Mega Backdoor Roth.

However, let’s say this person also has an ACA health insurance plan and, after reconciling the PTC and excess APTC repayment, they end up with a Self-Employed Health Insurance Deduction of $5000. This SEHID goes on Schedule 1, Line 17, so it doesn’t directly affect Schedule C, Line 31.

Is the compensation on which to base Solo 401(k) contributions still $46,467? Or do they have to subtract the $5000 SEHID, making the basis for the Solo 401(k) contributions only $41,467?

Does the person qualify to contribute $46,467 to Voluntary After-Tax Solo 401(k) or only $41,467?

[MarkNYC]

The limitation applies, but I believe it's the other way around: the deduction for the solo 401K contribution limits the amount of the deduction for SEHI. See Form 7206, particularly the line 9 subtraction required to calculate the SEHI deduction.

[MP123]

The relationship actually runs the other way, with deductible 401k or SEP contributions reducing available SEHID, rather than SEHID reducing contribution space. Roth 401k contributions don't have the effect.

This can be seen on Form 7206, line 9, and in the Worksheet for Sch 1 line 17.

Does the person qualify to contribute $46,467 to Voluntary After-Tax Solo 401(k) or only $41,467?

They can contribute the $46,467 to Roth and still take SEHID, but if made to traditional then there will be no SEHID available, because the contribution will exhaust the net income that could have been used for SEHID. Note the SEHID doesn't reduce the traditional contribution space, it's the other way around.

We had a pretty good discussion about it here: viewtopic.php?p=8204220

[GoldenBear17]

The relationship actually runs the other way, with deductible 401k or SEP contributions reducing available SEHID, rather than SEHID reducing contribution space. Roth 401k contributions don't have the effect.

This can be seen on Form 7206, line 9, and in the Worksheet for Sch 1 line 17.

Does the person qualify to contribute $46,467 to Voluntary After-Tax Solo 401(k) or only $41,467?

They can contribute the $46,467 to Roth and still take SEHID, but if made to traditional then there will be no SEHID available, because the contribution will exhaust the net income that could have been used for SEHID. Note the SEHID doesn't reduce the traditional contribution space, it's the other way around.

We had a pretty good discussion about it here: viewtopic.php?p=8204220

First, I assume you meant "They can contribute $46,467 to Voluntary After-Tax and still take SEHID"?

Besides that:

OK so if we agree that in the scenario I proposed the compensation to base Solo 401(k) contributions on is $46,467 and the SEHID, if taken in full, would be $5000, then that means the person could contribute any combination of Voluntary After-Tax and Pre-Tax up to $46,467 combined and as long as the Pre-Tax contributions were less than $41,467, that would leave the full $5000 SEHID? (Leaving aside that they probably don't qualify to actually do $41,467 in Pre-Tax contributions anyway in this case.) Just hypothetically if they were able to contribute $42,467 in Pre-Tax and did so, then the SEHID would be reduced to $4000, right? I've heard it described that the deductible half of SE tax + SEHID + Pre-Tax Solo 401(k) contributions can't exceed the compensation amount (Schedule C, Line 31 minus the deductible half of SE Tax). If it does, then the SEHID gets reduced until it all adds up? Is that right?

[MP123]

First, I assume you meant "They can contribute $46,467 to Voluntary After-Tax and still take SEHID"?

Yes, just for simplicity's sake. And leaving aside that they couldn't contribute the whole $46,467 to trad anyway, given the numbers. The distinction is between contributions that are deductible vs not.

Just hypothetically if they were able to contribute $42,467 in Pre-Tax and did so, then the SEHID would be reduced to $4000, right? I've heard it described that the deductible half of SE tax + SEHID + Pre-Tax Solo 401(k) contributions can't exceed the compensation amount (Schedule C, Line 31 minus the deductible half of SE Tax). If it does, then the SEHID gets reduced until it all adds up? Is that right?

Yes, that's a good way of looking at it.