Bird

Schedule E income is supplemental income, and I'm pretty sure that it is not earned income. Dr. Google confirms that but there is no cite. If it is not earned income it is not plan income. I generally fall back on "is it subject to self-employment tax" to confirm whether it is earned income or not.

If you're missing anything I can't find it. I think there is some funkiness to the results in certain ranges and circumstances. I think the intent of the rules would be to count the new loan as part of the "max in the last 12 months" but that's not how they read. I wouldn't mind being corrected.

Yet you need help from this board in doing it. You also have to physically move the accounts (a paper transaction but if Fidelity is involved it can and probably will go awry). Are you intending to maintain separate accounts? Make sure the plan reflects that. I'm not trying to be snarky; I am a do-it-yourselfer. But you will almost certainly make mistakes here. Whether they matter or not (getting "caught") is uncertain.

Filing a return and issuing participant statements does not make things final. Yes you can change the contribution and amend the return - if the plan allows for the type of contribution you are suggesting (everyone in their own group or at least owners in their own group).

IMO everything ties to the paydate, not the payroll ending date. (And I don't think it is just my opinion; you provided the cite.) The thing I find really odd about this is the extra work they must have gone to to come up with this result. I mean, we would just compare the payroll reports to the deferrals. They are apparently adding and subtracting to get their numbers, which is downright baffling but then again nothing surprises me too much. Unless...whoever entered the deferrals used the pay period ending dates instead of the payroll dates. OK, if so, that just gets corrected and you move on. (And if that is indeed the case, then the TPA should have figured it out. Again, nothing surprises me and "large insurance company" is a red flag. Often wrong but always arrogant.)

Right. Any citation would be a complicated and convoluted review of controlled group rules. One has to wonder what would make the buyer opine on this anyway.

Totally different purposes, and timing of contributions as well might make one an active (or inactive) for the W-2 while vice versa for other purposes such as this.

If the old loan was offset then I see no problem; it simply doesn't exist (except for the 12 month lookback on the max amount). As far as credit worthiness, I don't want to be the one denying a loan or advising a client to deny a loan for that reason, unless there is some blatant thing to point to like taking a loan 2 months ago and not making any payments. Not that this should matter, but it does: I don't think anybody (IRS) cares as long as you follow the rest of the rules on issuing and defaulting on loans. IMO the reason for having a limit on the number of loans is to create a bright line so that serial defaulters can be denied for something other than subjective creditworthiness.

Thanks for posting; this all sounded familiar. Derrin's argument (that you get to count compensation that is eligible for 401(k) contributions, even if a participant doesn't get an employer contribution) sounds fine in theory, but I wouldn't want to have to argue it to an IRS agent. Giving some PS eliminates that hassle. I'd be comfortable with $500...maybe $250. Not $1.

To clarify, you are using a single LLC which covers different business activities? I am guessing it is taxed as a partnership. How much each of you can contribute depends on how the income flows through the entity. In theory that is governed by some kind of agreement; in reality I'm guessing you haven't thought about it. If the agreement, formal or not, means that your wife shows $1000 of income, then that is all she can contribute as a deferral (401(k)). If you can direct some of your own income to her, then she could contribute more. I'm not saying that is ok to do if she has no involvement in your side of the business. Partnership accounting can be horribly complicated. Do you have an accountant?

Yes this. Depends on whether you are doing cash or accrued accounting on the contributions, and if cash, the timing. You are basically skipping the 2021 reporting so you can have a 2022 beginning balance even though it is the first return filed.

It would be very, very unusual for such a policy to be for the benefit of anyone besides the insured participant. It is possible to buy what is essentially "key man" insurance which is an asset of the pooled account (i.e. proceeds would be shared by all) but I wouldn't generally entertain that as a possibility. If you can find something from way back when that showed it came from the owner's account that would be ideal.* IMO life insurance CVs should be included in the val reports, including the 5500. I know of some (back in the day) who would show the premiums as an expense and then not include the CVs on the val/5500. (Based on a misunderstanding of what a "fully insured" contract is.) But going back to the smaller policy, you say premiums are being paid. Are they being taken from that participant's account or treated as an overall "expense" or investment of the plan? *This whole scenario/description is very worrisome and I have to wonder if it was totally botched.

It's done - a lot. I agree it is not supposed to be that way. Accountants and clients like it since withholding is easier than quarterly tax payments, I think. We always add (or net) the W-2 and net SEI.

fwiw I find these two items incompatible. "...and operates" indicates some level of involvement. I'd say it is practically impossible to own a small business and not be "employed." I don't have a problem including a 5% owner as being "employed" but would be careful about any hours requirements.

OP said $5000 remained so I assumed the answer to both was "no." I agree with concerns that a hard-coded document formalizing the haircut as final could be problematic.

An update on this - the accountant I had been speaking to posed the question himself, and got the same answer, which is that all (employEE and employER) contributions are deductible. The question was specific to the DC limit of $61,000 but the logic should apply to DB contributions as well. Full text is below. I am not entirely comfortable with it since, as noted in my original post, I know of a client who had the employER deductions disallowed about 10 years ago. From: Taxation Regulatory Services [TREAS] <Taxation.RegulatoryServices@treas.nj.gov> Sent: Thursday, August 31, 2023 11:24 AM To: xxxxxxxxxxxxxxx Subject: Qualified 401k Plan Contributions on Schedule C You made the following inquiry: “For a 2022 NJ-1040, Schedule C, NJ instructions state: "Deduct qualified contributions to a self-employed 401(k) Plan. Contributions that exceeded the federal limits are not deductible for New Jersey purposes." What is NJ's maximum qualified contribution for a solo 401(k) for a Schedule C business owner over 50 years with no employees? Does the deduction for qualified contributions include the employer and employee portion ($61,000) or just the employee amount ($27,000)? Thank you for your help with matter. If you could provide any specific code, it would be appreciated. I find the instructions to be too vague at https://www.nj.gov/treasury/taxation/njit11.shtml. NJ Division of Taxation - Income Tax - Business Income Income Tax - Business Income?" The treatment of 401(k) plans under the New Jersey Gross Income Tax Act is set forth at N.J.S.A. 54A:6-21: “Gross income shall not include amounts contributed by an employer on behalf of and at the election of an employee to a trust which is part of a qualified cash or deferred arrangement which meets the requirements of section 401(k) of the 1954 Internal Revenue Code, as amended.” In regard to 401(k) plan contributions, these contributions are tax-deferred for New Jersey income tax purposes and there is no contribution limit to 401(k) plans in the New Jersey Gross Income Tax Act. N.J.S.A. 54A:6-21. Taxes are not paid on employer contributions, which includes includes any 401(k) matching contributions, employer profit sharing contributions or any other types of contributions the employer made to the plan on your behalf. For 2022, Maximum elective contribution limit  $27,000 Maximum contribution limit (younger than 50)    $61,000 Maximum contribution limit (50 and older)  $67,500 .. The self employed 401k deduction should be deducted on Schedule NJ-BUS-1 unless the elective deferral was already deducted from wages on Form W-2 because the elective deferral cannot be deducted twice. From page 15 of the NJ-1040 instructions: “Schedule NJ-BUS-1 Business Income Summary Schedule Part I – Net Profits From Business Report the net profits or loss from your business, trade, or profession. Make the following adjustments to your federal Schedule C (or C-EZ or F): 1. Add any amount you deducted for taxes based on income. 2. Subtract interest you reported on federal Schedule C (or C-EZ or F) that is exempt for New Jersey purposes but taxable for federal purposes. 3. Add interest not reported on federal Schedule C (or C-EZ or F) from states or political subdivisions outside New Jersey that is exempt for federal purposes. 4. Deduct meal and entertainment expenses that constitute ordinary expenses incurred in the conduct of a trade or business but that were not allowed on the federal return. 5. Deduct your qualified contributions to a self-employed 401(k) Plan. Contributions that exceeded the federal limits are not deductible for New Jersey purposes. . . .” https://www.state.nj.us/treasury/taxation/pdf/current/1040i.pdf Therefore, the deduction for qualified 401k plan contributions include the employer and employee contributions up to the maximum contribution limit (younger than 50) of $61,000. I hope you find this information helpful.

Without PBGC being involved, I think it is doable. You'd need to amend the plan for any changes effective in 2023.

My answer would depend on how the 5% partner's income is taxed - probably as earned income and eligible for retirement plan contributions - and also how many hours this partner works (you seem to be saying 0) and finally what the plan says about hours requirements to enter and share in contributions.

You reference two years here, 2022 and 2023, but as far as 2022 goes, that ship has sailed. There is no opportunity to defer in a corporate setting other than through a paycheck.

The trustee is, or should be, the owner of the account(s), and the participant's role should be limited to directing investment transactions. Accordingly, the trustee should get, or be able to get, statements on the accounts and definitely should not have to rely on the participant(s). Since financial advisors and/or behemoths such as Fidelity have a strong presence in this end of the market, it is no surprise that the accounts are often set up incorrectly.

Sure. (I think) it is pretty clear that the prohibition on having a 5305 model SEP and another plan relates to contributions, not the mere existence of a document. It's just about 415 limits (again "I think"). Three is absolutely no audit circumstance under which the mere existence of a model SEP is discoverable (not that that makes it ok, but it kind of proves the point about why it might be a problem - limits, and, I suppose, testing).

That's what I understand, so no 1099-R is required.

Is there really a difference? I'm not sure what the paperwork looks like on the latter. If that is somehow do-able then Paul's statement about it being discriminatory is indeed a concern. The OP's fact pattern is contradictory (below)...will NOT receive but then wants to know if they can allow it..so we are all speculating.

I agree that this is the basic definition of a 401(k) arrangement, and that it is confusing - either the employer is trying to do something that doesn't make sense or it isn't being described properly. I disagree that it is discriminatory though. For the HCE(s?) it devolves to a 7% cash bonus that may be deferred if desired and if limits aren't exceeded.

A common tactic for getting a policy out of a plan without a big buyout or tax consequences is to have the plan borrow from the policy, thereby reducing the net CSV (FMV to be precise as noted above). Then you have a stripped-down policy with little or no value which can be bought or distributed more easily. Now the policyholder will own the policy, but will have to pay more outside the plan in interest to keep it going. And the cash value will be reduced because of the borrowing.