Catch Up Contributions

[SteveH]

Simple question? If you have an over 50 sole propreitor that has a small net schedule C that is trying to contribute as much as possible to a 410(k) profit sharing plan, do the catch up contributions count towards the 100% of pay limit?

$30,000 net schedule C

25% of pay profit sharing allocation

This leads to $2,119.43 half SE taxes, a $5,576.11 profit sharing allocation, and what must be the schedule C after pension contributions of $22,304.46. (22,304.46 + 2,119.43 + 5,576.11 = 30,000)

Now if we add some deferrals to the profit sharing contribution we could go with $5,576.11 + $15,000 + $5,000. But this ends up with a total contribution of $25,576.11. That is over 100% of the $22,304.46 schedule C.

I visited two websites yesterday that calculate the maximum for a 1 person plan, and they both came up with the $25,576.11 number.

I thought the maximum would be somewhere between the $22,304.46 and the $25,576.11 because if you lower the profit sharing allocation down from the 25% of pay then the schedule C after pension will increase. So who is wrong here? Me or the websites?

I know the catchup contributions have to count towards the 100% of pay limit because then someone that is paid $1 could contribute $5,000 to the plan and that makes no sense.

[Below Ground]

The websites are right. Catchup is not considered under any limit, and deferrals are not part of the Net Schedule C Division. And yes, Catchups do allow you to exceed 100% of pay. This is possible as a person could defer 100% of pay and get an employer contribution. Since you must have pay to defer, the 100% limit does impact, but when talking about a total allocation potential.

Say person age 53 makes $20,000. Defers $15,000 as 75% of pay, gets employer of $5,000 which is 25% of pay, and also does $5,000 Catchup deferral. Total of contributions is $25,000. Allocation is 125% of pay! This is why one life 401(k) Plans make sense. Of course, one must be able to afford to do this.

With your Schedule C example you need to add back the deferrals to the Schedule C Income. Then you don't show a deduction of more than 100% of Schedule C Income.

Strange but true!

[Appleby]

See http://benefitslink.com/boards/index.php?showtopic=28235