contribution limits

[cpc0506]

Employee/Owner A made $53,000 last year.  He deferred $24,000 (he was catch up eligible for 2016).  Employer makes a safe harbor match contribution of 100% of deferrals up to 4%.  So his calculated safe harbor match is $2,120.  Employee/Owner would like to maximize his contribution.  There is enough non-owner compensation that we do not need to worry about the company's 25% deductible limit.

I have calculated his profit sharing as $26,880.  Another colleague is saying he can receive 32,880 in profit sharing since he is catch up eligible and his limit is actually $59,000 and not $53,000.  But I did not think that he could receive more than 100% of his compensation.

Who is correct?

[Lou S.]

The catch-up is not part of the 415 limit so your colleague is correct.

While you can't defer more than 100% of your income, you can be allocated more than 100% in this odd circumstance.

I'm assuming this passes all applicable nondiscrimination tests.

 

 

[cpc0506]

Can you cite some regulations.  Even the IRS website only mentions the lesser of:

$53,000 or

100% of compensation

Yes, the only employees in the plan are HCEs so we automatically pass all compliance testing.

[Lou S.]

See Internal Revenue Code Section 414(v)(3)(A)(i)

[CuseFan]

the only limits to which catch-up deferrals are subject are their own, nothing else

[cpc0506]

Then someone please explain to me why the IRS website says:

The annual additions paid to a participant’s account cannot exceed the lesser of:

1. 100% of the participant's compensation, or

2. $54,000 ($60,000 including catch-up contributions) for 2017; $53,000 ($59,000 including catchup

contributions) for 2016.

I read this to mean that he is always bound by his compensation if less than the lmits.

[Belgarath]

Lou already gave you the answer. You are looking at the definition of annual additions, which cannot exceed...

Catch-ups are NOT considered annual additions, and are not subject to 415 limitations. Also see Treasury Regulation 1.415(c)-1(b)(2)(ii)(B).

[RatherBeGolfing]

12 minutes ago, cpc0506 said:

Then someone please explain to me why the IRS website says:

The annual additions paid to a participant’s account cannot exceed the lesser of:

1. 100% of the participant's compensation, or

2. $54,000 ($60,000 including catch-up contributions) for 2017; $53,000 ($59,000 including catchup

contributions) for 2016.

I read this to mean that he is always bound by his compensation if less than the lmits.

You are incorrect.  As Lou has pointed out catch-up contributions are NOT subject to  IRC §415.  See IRC §414(v)(3)(A)(i).  Therefore, when you are determining whether an employee's annual addition exceeds the  limit in §415(c), you should NOT include catch-up contributions

[My 2 cents]

Perhaps the point of confusion arises because, unlike the dollar limit, it is not possible to directly calculate, a priori, what the percentage of pay limit would be if there was a $6,000 catch-up.  They would have to say "1. 100% of the participant's compensation (plus $6,000 catch-up contributions if applicable), or".  Maybe they should have done so, to make it more unambiguous.

[RatherBeGolfing]

 

39 minutes ago, My 2 cents said:

Perhaps the point of confusion arises because, unlike the dollar limit, it is not possible to directly calculate, a priori, what the percentage of pay limit would be if there was a $6,000 catch-up.  They would have to say "1. 100% of the participant's compensation (plus $6,000 catch-up contributions if applicable), or".  Maybe they should have done so, to make it more unambiguous.

Its clear that the annual additions is X. The fact that you can get MORE than the annual additions doesn't change what the annual additions is. What OP quoted is an explanation of annual additions, not an explanation of the the most a participant can possibly be allocated in a plan year. It really isn't ambiguous, just different (yet related) concepts.

[jpod]

Say you have a one-person "solo 401k" maintained by a Schedule C filer.  Her net income from self-employment is $20,000.  She is age 50+.  While she may be able to contribute $26,000 without disqualifying the plan, she'll only get a deduction for $20,000, right?   

[Mike Preston]

It is a bit complicated.  If the $26,000 is all deferral then there is a problem because it still has to be a deferral so the max is really $20,000.  However, if net income from self-employment is really $20,000 then the income from self-employment before reduction for the Self-employment Tax Adjustment is $21,520.37.  Working the other way, if the employer contrbution is a little less than $3,400 ($3,373.05) the net Schedule C works out to be $16,865.25, so a deferral of $16,865.25 + employer contribution of $3,373.05 means that income from self-employment starts out $3,373.05 lower than $21,520.37: $18,147.32, but the total excluded from income is $20,238.30.

YMMV

[Lou S.]

1 hour ago, jpod said:

Say you have a one-person "solo 401k" maintained by a Schedule C filer.  Her net income from self-employment is $20,000.  She is age 50+.  While she may be able to contribute $26,000 without disqualifying the plan, she'll only get a deduction for $20,000, right?   

Mike has a better detailed explanation but assuming $20K in "pensionable income" the solo-k participant is effectively going to be limited to $20K maximum contribution. While they technically could receive $26K and not violate 415 you have a non-deductible contribution subject to the excise tax under every conceivable scenario that I can think of if you try to contribute more than the earned pensionable income.

[Mike Preston]

Lou, one really needs to run the numbers.  It matters.  With a maximally effective allocation of employer profit sharing you will find that the maximum contribution does, in fact, exceed the pensionable income by a significant amount  In my example, 100% of the pensionable income is deferred and the employer profit sharing is on top of that.  The net result is that the total contribution is 120% of the pensionable income.

[ETA Consulting LLC]

On 7/11/2017 at 6:31 PM, Mike Preston said:

It is a bit complicated.  If the $26,000 is all deferral then there is a problem because it still has to be a deferral so the max is really $20,000.  However, if net income from self-employment is really $20,000 then the income from self-employment before reduction for the Self-employment Tax Adjustment is $21,520.37.  Working the other way, if the employer contrbution is a little less than $3,400 ($3,373.05) the net Schedule C works out to be $16,865.25, so a deferral of $16,865.25 + employer contribution of $3,373.05 means that income from self-employment starts out $3,373.05 lower than $21,520.37: $18,147.32, but the total excluded from income is $20,238.30.

YMMV

I follow your math, but not the logic.  I'm not sure where the mixup is, so I'll ask a question.  Once the SE Tax is Calculated for the owner, wouldn't we both agree that it is not recalculated after the Employer Contribution is made?  Hence, if Schedule C less 1/2 SE Tax is 20K, then an Employer Contribution of $3,373.05 would now generate an Earned Income Figure of $16626.95; which would be his maximum deferral.  I think this is consistent with Lou's point.

I'm not sure, but you seemed to go back to Gross Schedule C of $21,520.37 after having arrived at the Net Schedule C Starting point of $20K.
 

I followed your math:
Start at 21520.37 (x.9235) = 19874.06  
19874.06 x .153 = 3040.73
3040.73 / 2 = 1520.37
21520.37 - 1520.37 = 20,000

After the employer contribution of 3373.05 is made, then Earned Income should be 16,626.95; and this should be the maximum deferral.

What am I missing?

[Mike Preston]

Must be the 7/15 deadlines, but you are right.  The 1/2 adjustment is not changed because a portion of the annual additions are employer contributions.  Don't have time to re-do the calcs.

[Lou S.]

On 7/11/2017 at 5:04 PM, Mike Preston said:

Lou, one really needs to run the numbers.  It matters.  With a maximally effective allocation of employer profit sharing you will find that the maximum contribution does, in fact, exceed the pensionable income by a significant amount  In my example, 100% of the pensionable income is deferred and the employer profit sharing is on top of that.  The net result is that the total contribution is 120% of the pensionable income.

I get that you can do that and not violate 415 or the plan terms.

My question is how do you deduct it? Maybe my understanding is wrong but I didn't think the deduction on line 28 of the 1040 can't exceed the income on line 12 of the 1040 and whether it is 401(k), catch-up, match or profit sharing it all goes on line 28 for the solo-k person.

But maybe I'm missing something obvious.

 

[Mike Preston]

What if it is a joint return, or there are two sources of income?