415 limits on earned income and employee compensation

[Guest egoldberg]

If an employee of a corp. earns $170,000 and defers $10,500 in a 401(k) plan; can the same person start his own profit sharing plan and contribute $25,500 if his net earned income from self employment is $200,00?

[AndyH]

I think some clarification is needed. Is this an unrelated "side" business, so that he's both an employee and has his own business and he makes that much in each?

Or, is he a "consultant", treated as a non-employee, and all his income is Schedule C?

It's important to determine if he is an employee or not. If he's not, how did he get in the company's 401(k) plan?

[Guest egoldberg]

The $200,000 comes from an unrelated side business.

[rcline46]

If directly or with attribution the person owns less than 50% of the other company, and there are no controlled group or ASG relationships involved, then a person can have separate 415 limits for separate incomes.

An exception to this rule occurs if the other plan is a 403(B) plan. This is like a teacher or doctor who also has their own income. the 403(B) is treated as THEIR plan and 403(B) contributions count against applicable 415 limits.

[Guest Mr. X]

Just remember that the actual earned income used for determining the contribution for sole proprietorships is reduced for the contribution and 1/2 of self-employment taxes. If his earned income of $200,000 is prior to those reductions, your earned income used will actually be less than $170,000 and your contribution will be less as well. Based on a 2001 calendar year plan I get the following: Net Earned Income - 167,250, contribution - 25,087.

[wmyer]

Mr X, that's only true if you use 15,325.90 as his self-employment tax. However, don't forget that he's already paid social security tax up to the maximum, since he has a W-2 from another company. His self-employment tax will thus be only 5,356.30 (184,700 x 2.9%), and he will net down to 171,821.85 for 2001, which is reduced to the 401(a)(17) limit of 170,000.

[Guest Mr. X]

You are correct. I forgot to consider the other employer.