Safe Harbor 401(k) for Sole Proprietor

[MarZDoates]

Is it possible to set up a safe harbor 401(k) for a sole-prop with no employees? His income is $130,000. He wants to be able to get a $40,000 contribution. He can't get there with a SEP or Profit Sharing because of the 25% limit on employer contribution.

But if he had a safe harbor 401(k), he could defer $12,000, match 3% ( or 4% if using basic match) of $130,000 ...$3,900 then contribute $24,100 as a profit sharing contribution. Can this be done??? Would it be practical? Or am I way off course?

Any input is greatly appreciated.

[Earl]

I believe that bottom line sched C of $152,304 ($147,236 in 2003) will allow the 415 limit in a PS/401(k).

If you split the company contribution into PS & match rather than just PS, I don't think it gets you anything extra. They both are excluded from income and count toward 404 limit the same way. The safe harbor issue is irrelevant with no employees.

[four01kman]

Safe harbor is not the issue. Plan design is. A regular 401k will generate up to $12,000 that is not counted in the 25% of pay limit. So whatever number gets you to the maximum ($40,000 for 2003) will dictate the overall plan design.

[Mike Preston]

Earl, how do you arrive at your maximum number for 2003?

If Sole Prop income is $152,435.22 in 2003, the 1/2 FICA deduction is $7,435.22, leaving exactly $145,000. Subtracting $29,000 leaves $116,000 as "compensation". $116,000 times 25% is $29,000.

With sole prop income of $147,236, the 1/2 FICA deduction is $7,365.60, which when combined with a contribution to the PS of $27,974 would leave $111,896.40 as pensionable earnings. 25% of $111,896.40 is $27,974.

[Earl]

upon further review....

I think I ran it out before my software was updated with the new SS numbers, however:

147,367 - bottom line Sched C

7,367 - deductible OASDI

140,000 - earned income

(28,000) - excluded

112,000 - plan income

x .25

28,000 - PS contribution

12,000 - 401(k)

2,000 - cud, if eligible

42,000 - 415 limit, if cud eligible

concur, or am i still off base? thanks

[Mike Preston]

Yup, concur. I was still stuck on the 29000 figure for 2002.

Sorry.

cud, huh? ;-)