Interaction of SIMPLE, SEP, and 401(k) limits (long)

[UM1234]

Hi,

I searched the net and this forum and couldn't find answers, so I'm posting here.

I realize this is a very long post. Any comments are very much appreciated.

Client, a physician under age 50, is a W-2 employee of a hospital and will contribute $17,500 to his 403(b) there in 2014. Assume he receives $2,500 of employer match, for a total of $20,000 in additions to the 403(b). This W-2 employment is ending ~ November 2014 and is being immediately replaced by new W-2 employment that offers a 401(k) plan with $4,500 match, assuming client makes max contribution which he will. Technically, the new employer’s match is discretionary, but it is reasonable to expect the full match each year. Client will not contribute to new 401(k) in 2014 because he will have maxed his 403(b).

Client also expects $45K of independent contractor income from moonlighting at another hospital (net of expenses) in 2014. He has received some of that income paid to him directly, and will receive the remainder in an LLC he just created. For simplicity, let's say he has $45K "net earnings from self-employment income." The hospital at which he moonlights is not affiliated with the hospital at which he is a W-2 employee. He has no employees in his independent contractor work. Client expects $70K net earnings from SE income in 2015 and beyond, all paid to his LLC.

Issue 1

I am trying to determine which retirement plan is best for his self-employment income. Options I see are SIMPLE IRA, SEP IRA, and solo 401(k). Analysis is below with questions in bold red. I would welcome comments.

Summary:

2014

SIMPLE SEP Solo 401(k)

Client Pre-Tax Contributions $30,350 $26,500 $26,500

Match from W-2 Employer $2,500 $2,500 $2,500

Total $33,350 $29,000 $29,000

2015 and Beyond

SIMPLE SEP Solo 401(k)

Client Pre-Tax Contributions $31,600 $31,500 $31,500

Match from W-2 Employer $4,500 $4,500 $4,500

Total $36,100 $36,000 $36,000

Note: “Client Pre-Tax Contributions” includes W-2 401(k) employee deferrals, SIMPLE/Solo 401(k) employee deferrals, and SIMPLE/SEP/Solo 401(k) employer contributions. It’s the sum of all the dollars the client avoids income tax on.

1. SIMPLE IRA. Can client do $12K employee deferrals even though he has maxed his W-2 403(b) in 2014 / would max his W-2 401(k) in 2015 and beyond? If yes, then:

a. For 2014, max employee deferral is $12K, plus an employer contribution of 3% x $45K = $1,350. Total $13,350. Plus $17,500 to W-2 403(b) = $30,850 total pre-tax contributions by client. Plus $2,500 assumed 403(b) match = $33,350 total retirement additions.

b. For 2015 and beyond, assume employee max still $12K, plus an employer contribution of 3% x $70K = $2,100. Total $14,100. Plus $17,500 to W-2 401(k) = $31,600 total pre-tax contributions by client. Plus $4,500 401(k) match = $36,100 total retirement additions.

2. SEP IRA. No employee deferrals. Max employer contribution is 20% of net earnings from self-employment income. Can client max this employer contribution even though he has maxed his W-2 403(b) in 2014 / would max his W-2 401(k) in 2015 and beyond? If yes, then:

a. For 2014, 20% x $45K = $9K. Plus $17,500 to W-2 403(b) = $26,500 total pre-tax contributions by client. Plus $2,500 assumed 403(b) match = $29K total retirement additions.

b. For 2015 and beyond, 20% x $70K = $14K. Plus $17,500 to W-2 401(k) = $31,500 total pre-tax contributions by client. Plus $4,500 401(k) match = $36K total retirement additions.

3. Solo 401(k).

a. For 2014, no employee deferral because client has maxed 403(b) at W-2 employer. Max employer contribution is 20% of net earnings from self-employment income. Same question as above: Can client max this employer contribution even though he has maxed his W-2 403(b) in 2014 / would max his W-2 401(k) in 2015 and beyond? If yes, then 20% x $45K = $9K. Plus $17,500 to W-2 403(b) = $26,500 total pre-tax contributions by client. Plus $2,500 assumed 403(b) match = $29K total retirement additions.

b. For 2015:

i. Client should max his W-2 401(k) to capture the $4,500 match. Then I doubt a solo 401(k) would make sense because he couldn’t make employee deferrals if maxing W-2 401(k), and a solo 401(k) carries administration and expense that a SIMPLE or SEP doesn’t.

ii. Just to work through the scenarios though:

1. If he can still make the max employer contribution to a solo 401(k) when he is maxing a W-2 401(k), then 20% x $70K = $14K. Plus $17,500 to W-2 401(k) = $31,500 total pre-tax contributions by client. Plus $4,500 401(k) match = $36K total retirement additions.

2. If client makes employee deferrals to a solo 401(k) instead of his W-2 401(k) – which wouldn’t make sense due to the W-2 401(k) match, but just to work through this - then assume employee max still $17,500, plus employer contribution of 20% x $70K = $14K. (I believe you can do 20% x $70K, not 20% of [$70K - $17,500 employee deferral], but tell me if I’m off base.) Total $31,500 pre-tax contributions by client, and $31,500 total retirement additions (no W-2 employer match).

Issue 2

In 2014, he will receive some SE income paid directly to him, and some paid directly to his LLC. Say it is $22,500 each, total $45K. Will he create only one plan (SIMPLE, SEP, solo K) and use $45K net SE earnings to determine his contribution? And, will he report the entire $45K on one Schedule C? I am guessing the answer to both questions is Yes, because for federal tax purposes, single-member LLCs are disregarded (they are created under state law, not federal).

Again, thank you very, very much for your time!

[QDROphile]

See IRC section 402(g) (1) and (3) concerning aggregation of elective deferrals for limit applicable to the individual.

[Flyboyjohn]

2014:

He's maxed his 402(g) limit so can't do any more elective deferrals to any plan

Can't do a SIMPLE, would violate the "only plan" restriction since he's considered the "owner" of the 403b

Can do a SEP for roughly $9,000 as you suggested

2015:

Assuming he's not the owner of the new W-2 employer he should max his 401k there ($17,500) and get that match

Should do a SEP for the side income (about $14,000 based on your estimates)