Individual 401k and employer sponsored 401k

[kevin59]

My Wife was enrolled in Individual 401K plan for FY 2017. Her contract got over last month and now got  a full time offer in which the company is offering 401k.

She has yet to make contributions to the individual 401k Plan.

My question is : If she joins the new employer, can she still take the benefit of employer sponsored 530000 K limit ? I know she can also claim 18000 for FY 2017 in her individual 401K.

Can she decline the 401k offer from her new employer and be eligible for the employer contribution through her own company?

Thanks

Suman

[Zbucklyo · Accepted solution]

She can certainly enroll in the employer 401 (k) and still be eligible for the employee contribution from her self-employment 401 (k) plan. However, the maximum amount that she can contribute on the employee side of the solo 401 (k) plan is reduced by her employee contributions to the employer plan.  To summarize:

(1) For the employee portion of her solo 401 (k) plan, she can contribute up to $18,000 ($24,000 if over 50) minus the amount she is contributing the new employer plan.

(2) The amount she can contribute on the employer side of her solo 401 (k) is unaffected by the new employer plan (other than she is bound by the overall contribution limits of $54,000 in each plan for both employee and employer)

(3) On the solo 401 (k), she can contribute no more than her net profit from self-employment minus the deductible portion of her self-employment tax minus any deductions for self-employed health insurance premiums.

EDITED to reflect comments by dmertz - the retirement plan guru

[dmertz]

The $18,000 is a per-individual limit across all 401(k)-type plans, so the $18,000 limit applies to both plans combined.  The $54,000 is a per-plan limit, so each of these plans has a separate $54,000 limit.

[kevin_ny_2003]

On the solo 401 (k), she can contribute no more than her net profit from self-employment minus the deductible portion of her self-employment tax minus any deductions for self-employed health insurance premiums.

The net profit: Does this mean that the salary she paid herfelf or the company net profit? For example: Net Revenue of company: 10K
She paid 4K to her in Salary
The net profit on Company is 6K

In this case the employer can contribute 25% of the salary paid:  1000 from employer side
She can contribute a max of 4K or 6K( net company profit) from her ( employee side) for the 18 K bucket in FY2017?

Please clarify

Thanks

[dmertz]

If she files Schedule C, she does *not* pay herself a salary.  Her net profit is the profit shown on Schedule C and her net earnings are her net profit minus the deductible portion of her self-employment tax.

If she actually receives a salary or wage from a corporation and the corporation issued her a W-2, she is not self-employed.

[kevin_ny_2003]

Dmertz: Thanks for your response. She pays herself a salary via her S Corp Payroll and get a W2 generated at the end of the year. Does this mean in this case she is not entitled for individual 401K Plan?

[dmertz]

Since you refer to this as her S Corp, I assume that she is the only shareholder.

[Ignore the paragraph that follows, which is entirely wrong due to confusing the employee elective deferral limit with the employer profit-sharing limit, and see my later comment.  I won't correct this paragraph since doing so would put your follow-up comment out of context.]

Her maximum elective deferral is 25% of the $4K that she paid herself as compensation (assuming that combined with any elective deferral to the new employer's plan here total elective deferrals do not excess $18,000).  That 25% must be excluded from the amount reported in box 1 of her W-2 and shown with code D in box 12 of her W-2.    The S Corp can also make an employer profit sharing contribution.

The total of employee elective deferrals and employer profit-sharing contributions for the year cannot exceed 100% of her $4K of compensation.  These combined amount of these contributions would be deducted on the S Corporation's tax return (Form 1120S).

[kevin_ny_2003]

Her maximum elective deferral is 25% of the $4K that she paid herself as compensation.  --- Can you please confirm if the 25 % limit applies to the employee as well? Basesd off what I read is that the employer can't contribute more than 25% of the compenstaion paid to employee but the employee can contribute a max of 18 on her side.

From IRS site:

<a rel="nofollow" target="_blank" href="https://www.irs.gov/retirement-plans/one-participant-401k-plans">https://www.irs.gov/retirement-plan...>


Contribution limits in a one-participant 401(k) plan

The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:

Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
$18,000 in 2016 and 2017, or $24,000 in 2016 and 2017 if age 50 or over; plus
Employer nonelective contributions up to:
25% of compensation as defined by the plan, or
for self-employed individuals, see discussion below
If you’ve exceeded the limit for elective deferrals in your 401(k) plan, find out how to correct this mistake.

Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $54,000 (for 2017; $53,000 for 2016)

Example: Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2016. He deferred $18,000 in regular elective deferrals plus $6,000 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2016 were $36,500. This is the maximum that can be contributed to the plan for Ben for 2016.

A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that his limits on elective deferrals are by person, not by plan. He must consider the limit for all elective deferrals he makes during a year.

[dmertz]

Sorry, I'm half asleep today.  It's the employer profit-sharing contribution that cannot exceed 25% of compensation.  The total of her elective deferrals and the employer profit-sharing contribution is limited to 100% of compensation ($4K), so if all was allocated to employee elective deferrals, the maximum elective deferral would be $4K and no employer profit sharing contribution would be permitted.  However, this would limit elective deferrals at the new employer to $14K so as not to exceed the $18,000 limit on elective deferrals.  So it would probably be better to make a 25% of compensation ($1K) employer profit-sharing contribution and $3K of elective deferral, allowing $15K of elective deferrals at the new employer.