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401(k) and Profit sharing in a Sub-S corporation for a single owner


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17 replies to this topic

#1 BruceCM

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Posted 24 March 2005 - 03:48 PM

S-Corp organization is popular for small business owners, as a means of avoiding the 7.65% FICA on earnings, which instead are treated as dividends.

My question is maintaining a 401(k) plan within an S-Corp.

If an S-corp owner (sole employee) pays himself $20,000, will the 25% of participating payroll limit his TOTAL contributions from salary deferral and employer contributions to the 25% ($5,000), or does this 25% represent only the employer's contribution and 402(g) salary deferral will be in addition to this, with 100% of salary being the final limitation?

Thanks

#2 WDIK

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Posted 24 March 2005 - 03:56 PM

When you refer to "the 25% of participating payroll", I presume that you are referring to the deduction limit. Salary deferrals are not taken into account for the deduction limit. Salary deferrals (but not catch-up contributions) are taken into account for the annual additions limit.
...but then again, What Do I Know?

#3 Appleby

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Posted 25 March 2005 - 02:10 PM

Therefore, if the S-Corp. owner pays himself $20,000 in W-2 wages, the maximum contribution will be $5,000 employer contributions ($20,000 X 25%) + $14,000. If he is age 50 by year-end, he may contribute an additional $1,000 as catch-up…or $14,000 + $4,000 catch-up + $2,000 employer contribution.

#4 wmyer

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Posted 25 March 2005 - 02:24 PM

I assume we're talking about 2005. So, if S-Corp owner is 50 or older and pays himself $20,000, he can get:
$14,000 deferrals
$4,000 catch-up
$5,000 deductible employer contribution (25% of $20,000).
Total $23,000 in contributions.

I see no reason why he can't go over 100% of compensation if he's over age 50.

#5 Appleby

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Posted 25 March 2005 - 02:35 PM

I see no reason why he can't go over 100% of compensation if he's over age 50.

...what about the 100 percent limit?

#6 wmyer

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Posted 25 March 2005 - 02:37 PM

Appleby, see http://benefitslink....showtopic=28235

#7 mbozek

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Posted 25 March 2005 - 05:56 PM

What advantage does an employee get by making contributions which exceed 100% of pay? An ee who has 20k in taxable income and contributes 23K to retirement plans loses 3k in deductible tax benefits. Most employees in the 15% tax bracket would be better off contributing 3k to a roth than to a deductible retirement plan. the 15% tax bracket is available to a married couple with 2 dependents with up to 80k in taxable income.
mjb

#8 Blinky the 3-eyed Fish

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Posted 28 March 2005 - 10:21 AM

Mbozek, I don't understand your analysis. With an S-corp there still is the pass-through income to the owner that must be considered for individual taxes. The deferrals will lower the W-2 taxable income and the employer contribution will lower the pass-through amount. There is no loss of $3K in deductible benefits.

I think you will find that most sole owners of an S-corp aren't in business too long and certainly don't have a retirement plan if they are only making $20K.
"What's in the big salad?"
"Big lettuce, big carrots, tomatoes like volleyballs."

#9 mbozek

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Posted 28 March 2005 - 10:51 AM

I was responding to Wmyers post which took the position that a S-corp owner could contribute 23k to a retirement plan on 20k of income. My comment was focused on what tax benefit would the owner recieve if the deductible contributions exceed the max wages paid. I know Scorp owners with 20k or more in income who have SEPs because the Scorp is not their day job.
mjb

#10 Blinky the 3-eyed Fish

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Posted 28 March 2005 - 11:05 AM

I still don't understand entirely your point even if your post is just in response to Wmyers' post. You said that there is a loss of $3k in retirement benefits. Where do you get this figure? You see if there were no pass-through income and all was paid as W-2 wages, there is a $5k employer contribution, which creates a $5k loss. If there was sufficient pass-through income, then the entire $5k is utilized that year. It's only if there was $2k in pass-through income before the contribution where the $5k employer contribution would cause a $3k loss that matches your figure. So you see why I don't understand the $3k figure?

Anyway, even if a loss was created, and I am no accountant for sure, couldn't this loss offset other individual income and be a benefit?
"What's in the big salad?"
"Big lettuce, big carrots, tomatoes like volleyballs."

#11 mbozek

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Posted 28 March 2005 - 05:07 PM

B: I dont understand your reponse. I will defer to the accountants but dont think that an S-Corp can pass through deductions for contributions to a retirement plan that exceed the amount of W-2 income paid by the S Corp and secondly under IRC 1366 the deduction for losses is limited to the amount of the S Corp owner's basis in the business. If The S corp owner contributed 1k in cash in return for 100% of the stock and the loss is 3k, the max loss passed through to the owner's 1040 is 1k.
mjb

#12 Blinky the 3-eyed Fish

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Posted 29 March 2005 - 09:49 AM

I think the accountants are all busy this time of year. I can say though that my understanding is that an S-corp can deduct more than the W-2 paid.
"What's in the big salad?"
"Big lettuce, big carrots, tomatoes like volleyballs."

#13 mbozek

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Posted 29 March 2005 - 10:18 AM

Maybe but under IRC 1366 doesnt comp in excess of S corps owners K-1 income becomes a loss which is not deductible once it exceeds the owners basis in the S-Corp? Otherwise an S-Corp becomes an unlimited tax shelter for S-Corp owners who maintain a DB plan where deductible contributions exceed K-1 income and the lossses are deductible against taxable income of the owner on the 1040.
mjb

#14 Lame Duck

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Posted 29 March 2005 - 02:21 PM

I doubt that you even have a loss in this situation. From what I have seen of most S-corps is that the owner pays a very small W-2 compensation and passes through the remainder of the income on the K-1.

For example, assume that the W-2 is $20,000 and the additional income of the corporation is $100,000. In that case, the participant would be able to defer $14,000 (for 2005) plus an additional $4,000 (if age 50), for a total deferral of $18,000 and net taxable W-2 income of $2,000. In addition, the coporation would make a contribution of $5,000 out of the $100,000 in net profits. The remaining $95,000 would be distributed on the K-1.

#15 WDIK

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Posted 29 March 2005 - 02:33 PM

Lame Duck:

How would the scenario play out if the additional income to the corporation is only $1,000 rather than $100,000?
...but then again, What Do I Know?

#16 Lame Duck

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Posted 29 March 2005 - 03:10 PM

I am not a CPA, so don't quote me on this, but I believe the corporation would be limited to a deductible contribution that does not exceed the owner's basis in the corporation, plus the $1,000 in profit.

#17 BruceCM

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Posted 29 March 2005 - 07:32 PM

Thanks for the responses....I think I've got the picture now...although still not sure if total contributions to employee's DCP can exceed 100% of salary, as I've always understood the 415© limitation to be the lesser of 100% of salary or $42,000 (2005), with BOTH the ER and EE's contributions counting towards this limitation. Is my thinking incorrect?

#18 Blinky the 3-eyed Fish

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Posted 30 March 2005 - 11:07 AM

As discussed in the link in Wmyer's post and as mentioned in the first response to your post by WDIK, the 415© limitation is an annual addition limitation. Catch-up contributions by definition are not annual additions and that is why they, when coupled with true annual additions, can exceed 100% of pay and exceed $42,000 in 2005.

So in short, yes, your thinking is incorrect.

As for the accounting questions before, I defer to a CPA post- 4/15.

Edited by Blinky the 3-eyed Fish, 30 March 2005 - 11:09 AM.

"What's in the big salad?"
"Big lettuce, big carrots, tomatoes like volleyballs."