Deferred Compensation - Used for contributions or not?

[ldr]

Good afternoon to all,

 

I have been asked to research a question presented by a referral source.  I do not have any more information that what is presented below:

 

"I have a client who was a W2 employee January - September of this year. His employer did not have a 401(k) plan and he made no contributions to other plans. As of October 1, he changed his status to 1099 contractor for the same company. When he changed his status it triggered deferred compensation, a lump sum of $400,000 which he will receive at the end of this year. For October - end of the year, he will receive approximately $60,000 of 1099 income from the new consulting business.

Both the owner and the spouse are over 50 years old.

He wants to max out his Owner K to help defer some of this very large tax bill. Can he use some of the deferred comp? Or can only the 1099 income go into the Owner K? Same question for the wife. It was previously stated that she could receive a contribution, but is her limit subject to the 1099 income, or can the deferred comp dollars count?"

 

This is not my area of expertise and while I have a general notion that deferred compensation is not able to be used in retirement plan contribution calculations, someone out there may know of exceptions to this.

 

Any help will be appreciated.

 

[ldr]

Further information:  We suggested to the referral source that his client should live on his deferred compensation payment and contribute ALL of his compensation earned in his new arrangement October-December to his Solo K.  The referral source said that yes, they had planned on that approach, but that they had really hoped to be able to do more than just that.  Like, start a DB plan and eat up most or all of the $400,000 payment, if possible.

Of course that brings up the idea that a DB plan isn't supposed to be a one time, flash in the pan, but a sustained funding of a benefit over a period of time, etc. etc.  Even ignoring that aspect of the question, I still don't see how the $400,000 payment from his employer can be turned into income that is usable for qualified plan calculations.  

Any thoughts?

 

[CuseFan]

That $400,000, if properly reported, will come to him via a W-2 from his (former) employer as it is (formerly deferred) compensation from that employer. So in no way may it be considered self employment earnings for pension purposes.

[jpod]

Fwiw, if the "trigger" in 409A terminology is "separation from service," moving from employee to IC status may not be a separation from service for 409A purposes if he will continue to provide services to his former employer as an IC.  It could be, but it may not.

[ldr]

@CuseFan, that's what we believed, too, and thank you for confirming it.

@jpod, thank you for the fresh idea.  We will pass that along to the broker and see if it's too late already to avoid getting paid the deferred compensation.  By the way, I saw the posting yesterday about your retirement.  Congratulations!  You will be missed.