401k and DB Plan. Which contribution reduces compensation first?

[KevinO]

Self employed person with no employees has a 401k and a DB Plan. Sched C income minus 1/2 SE tax is $120k in 2017. Required minimum DB plan contribution is $200k for 2017. If the only retirement plan contribution he makes for 2017 is the $200k contribution to DB Plan, I understand he can deduct only $120k of it in 2017, and will have a carryover of $80k deduction, which he can deduct in future year(s) if he has sufficient compensation in future.

Is he allowed to make elective deferral and catch up contributions to 401k plan in the amount of $24k for 2017? Is he allowed to deduction the $24k 401k contribution and $96k of the DB plan contribution in 2017, and carryover to future year(s) the undeducted $104k of the DB Plan contribution? Or is he just not allowed to make a 401k elective deferral and catch up contribution in 2017 because the DB Plan contribution used up all of his compensation? 

 

The question is: which plan contribution uses up compensation first, the 401k or the DB Plan?  Is there a rule about this somewhere? Thanks.

 

[Lou S.]

The required contribution is more than his income, therefore his income (assuming he made the $200K contribution) is now $0. He can defer $0 from his $0 income.

At least  that is my understanding. Perhaps someone else has a different view of this.

[ETA Consulting LLC]

16 hours ago, Lou S. said:

The required contribution is more than his income, therefore his income (assuming he made the $200K contribution) is now $0. He can defer $0 from his $0 income.

At least  that is my understanding. Perhaps someone else has a different view of this.

Agreed.

Good Luck!

[Calavera]

Ask CPA/ERISA counsel  if this will work:

1. He made elective deferral and catchup of $24,000 during the year
2. He has to make $200,000 of MRC
3. His available DB deduction only $96,000 as ($120,000-$24,000)
4. He elects not to deduct $104,000 of DB contribution this year, and carryover it to future years.

 

[Mike Preston]

There are some seriious players at the IRS who question whether carryovers are possible in a sole prop.

[Belgarath]

I remember seeing, many years ago, a writeup by a "big name" accounting firm person that carryovers weren't allowed, and I kept a few notes. 404(a)(8)(C) provided that contributions satisfied the conditions of 162 or 212 to the extent that they did not exceed the earned income of the individual, so that contributions in excess of earned income were neither ordinary and necessary business expenses under 162, nor deductible under 212, and therefore nondeductible for ALL purposes under 404, including the carryover rules.

Having said that, in the very limited number of such situations I've seen, rightly or wrongly the accountants carried it over and deducted it in the future.

[My 2 cents]

The following represents my understanding.  Not an accountant or a lawyer.

1.  The amount required to be paid to a defined benefit plan to meet the minimum funding requirements is deductible (but what value is a $200,000 deduction if only $100,000 income?).  You have to meet the minimum required contribution, right?  Certainly, no excise tax for a non-deductible contribution.  Don't know about carryovers for tax purposes, especially for self-employed.

2.  In this odd situation, make no 401(k) deferral.  Probably more trouble than it's worth!

[KevinO]

Thank you all for your replies.  I'm surprised to learn that the law may not permit a self employed person to carryover to future years required minimum contributions to a DB Plan to the extent they exceed earned income even though it permits corporations to do so. 

[Mike Preston]

Welcome to our world.