Jump to content

Deduction limits for Self employed who sponsors a 401(k) Plan?


Guest Joe Vasko
 Share

Recommended Posts

Guest Joe Vasko

In 2002, a self employed individual who sponsors a 401(k) PS plan can make an employee deferral equal to the lesser of 100% of net earned income or $11,000. In calculating the 25% deductible PS contribution is this based on net earned income that includes or does not include elective deferrals?

Link to comment
Share on other sites

The 25% limit under Code Section 404 is based on a self-employed's net earned income which does not include any of the contributions made by or on behalf of the SE individual (and must be further reduced by 1/2 of the SE tax deduction and share of non-owner contributions). That being said, Code Section 404(a)(12), adds the elective contributions (and catch-up contributions) to compensation in calculating the 25% deduction limit. In the case of a 401(k), the elective contributions (and catch-up contributions) are then separately deductible under Code Section 404 (in addition to the 25% limit amount). The SE individual claims all of his or her contribution deductions on page 1 of Form 1040.

Link to comment
Share on other sites

  • 2 months later...
Guest lforesz

HELP!

In calculating the deductible limit for a partner in a partnership, do you know if the partners 401(k) contributions count towards the partnerships' 15% deduction for contributions to a 401(k) PS plan.

For example:

Total Eligible Compensation $1,000,000

Less 401(k) and 125 (80,000)

Deductible Compensation 920,000

Times 15% = deductible limit 138,000

Staff 401(k) 20,000

Staff and Partner PS 55,000

Staff and Partner Er match 60,000

Partner 401(k) 30,000

Are the contributions subject to the 15% limit the total of $135,000 or $170,000? Any help is greatly appreciated!

Link to comment
Share on other sites

The deduction limits prior to 2002 were based on taxable compensation and excluded elective contributions. Thus, if an individual with gross pre-plan W-2 compensation of $10,000 deferred $500, the aggregate deduction limit would be based on $9,500 under Code Section 404.

In your example, the $1,000,000 of compensation of the partner is not reduced below the $170,000 limit after all applicable reductions under Code Section 401©(2). Thus, the aggregate 15 percent deduction limit for 2001, attrbutable to this partner, is $25,500 ($170,000 X .25). Elective plus allocated employer contributiopns made to this individual may not exceed $35,000 for 2001.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...