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Is there a way to structure a solo 401k plan to count pass through income as eligible income for either after tax or deferrals


dragondon

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I have a client who is paid 40k in W-2 wages from their sole proprietorship
We are going to defer the max amount of 20,500 to his 401k and do 25% profit sharing. This gets us to 30,500 in the 401k account. We were going to do an additional 9500 of after tax to get to 40k in his 401k this year but we wanted to see if there are other options around compensation. 
He earns additional pass through income from this s-corp. 
Is there anyway to consider this pass through income as eligible compensation for the plan purposes so that we can defer additional amounts (this could be in after tax) to the 61k limit rather then 40k? How would we have to structure the s-corp and plan to allow for this, or is that even possible?

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Sole Proprietors don't receive W-2 from their sole proprietorship, they have earned income that is reported on Schedule C.

Since you said he has S-corp pass through income I'm going to assume you mixed up Sole Prop and S-corp. But who knows maybe he has both for some reason.

The answer to your question that the accountant should be able to tell you is to increase in 415 limit he'll need to pay himself higher W-2 wages (or have higher earned income if it really is sole prop) instead of dividend or distribution income from the S-corp. I mix up the correct term on distribution/dividend because I'm not a CPA but his CPA should be able to tell you.

 

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Apologies I meant to say S-corp throughout. So basically if he receives any pass through income that needs to instead need to be paid out in W-2 wages in order for it to be considered eligible income. It cannot be eligible income from a dividend/distribution/passthrough even if we change the definition of compensation in the plan doc? 

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2 hours ago, dragondon said:

Apologies I meant to say S-corp throughout. So basically if he receives any pass through income that needs to instead need to be paid out in W-2 wages in order for it to be considered eligible income. It cannot be eligible income from a dividend/distribution/passthrough even if we change the definition of compensation in the plan doc? 

Correct. K-1 from an S Corp is payments for being an owner. It's like getting a dividend check for owning stock in IBM. It's not earned income.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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General rule - if the employer and employee are not paying FICA/Medicare or SECA (self-employed FICA/Medicare) taxes on the income it is not earned income and not considered compensation for retirement plan purposes. 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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