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

[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?

[Gary Lesser]

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.

[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!

[Gary Lesser]

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.