No frills 401(k) Max Contribution

When calculating a maximum contribution, the total deferral + ER contribution a participant can receive can not exceed their W2 wages, correct?

Case in point -

Employee earns $28,400. 
Max 25% ER would be $7,100.  
Employee is older than 50 so could defer $26,000
Deferring the 402g limit would result in a $26,600 total contribution (19,500 + 7,100)
Adding the catchup... will she be limited to $1,800? Which would get her total contribution up to $28,400? which is her W2 wages?

In this case her husband is also an employee and earns $103,090.  No problem maxing out there.

Catch-up contributions do not count towards the annual additions limit.

Wife defers $26,000 (assuming we're talking 2021 limits here). That exceeds the 402(g) limit so $6,500 is reclassified as catch-up. The remaining $19,500 does count against the annual additions limit.

Her annual additions limit is the lesser of $58,000 or 100% of comp. In this case that's $28,400.

The amount she has left under the annual additions limit is $28,400 - $19,500 = $8,900. That is the maximum employer contribution that could be allocated to her for 2021.

That does exceed 25% of comp, but remember that the 25% deduction limit is applied on an employer-wide basis. $103,090 + 28,400 = $131,490 x 25% = $32,872.50 is the deduction limit for 2021. You could allocate $8,900 to the wife and the remaining $23,972.50 to the husband, if you wanted to.

This is assuming no other employees besides the husband & wife.

So wife works out like this (assuming she is older than 50):

26,000 deferral + 8,900 ER for a total contribution of 34,900?  And this is because the 6,500 catchup doesn't count towards the annual additions.  And to get to this the husband forfeits a little ER contribution.  And if I'm seeing this correctly, that enables them to defer an extra 6,500

Thanks for the lesson!

Assuming the husband is over 50, they can both defer $26,000, and the $32,875.50 employer contribution can be split any way they want between the two of them, with the only limits being that they each have to get at least some of it, and the maximum for the wife is $8,900. Also assuming that there are no other employees so no coverage or non-discrimination testing concerns.

Got it, thanks.

58 minutes ago, C. B. Zeller said:

employer contribution can be split any way they want between the two of them, with the only limits being that they each have to get at least some of it

That is the only requirement... each simply must get some of it (and as long as what each one gets doesn't exceed the annual additions limit)

Do you have some sort of compliance software?

just enter the relevant information and have the computer calculator it.

And is the husband the owner?  You didn't say so.

S-corp and the husband's comp is W-2 also?

if not, the calculations are different for deductibility.

Husband is the owner... and he said he is a C corp.  

Final question...  different client but on the same subject..

Let's say a single member business owner earns $25K  (a side gig).
He's 52 so he is eligible to make a catchup deferral
He maxes out his deferrals - 19,500
He wants to max out his ER - 6,250
This adds up to 25,750.  Can he categorize the added 750 as "catchup deferral"?

Defer 18,750
Catchup defer 750
Total defer 19,500

Well, it depends on the nature of the 25k.  (Schedule C number before SE taxes, versus a number on a W-2 paid by a corporation)

Because it's not impossible for the catch-ups and the employer contribution to push his total over the 100% of pay annual additions limit.

It sounds like a Schedule C.  First you have to reduce the Sched C income by 1/2 of SE tax.  For simplicity let's assume that net number is 25000.

I think his hard max is 25000.  If he takes the max employer contribution - which is 5000, not 6250 because the contribution reduces the income that is subject to the 25% limit - then that reduces his compensation to 20000.  He could do 19500+500.  Or just forget the employer part and do all deferrals - 19500 regular plus 5500 catchup.

Good point - whatever amount he might elect as the ER portion just reduces the net income he could defer from. 

For a SE person, and if they are the only person benefiting in the plan, the deductible limit is really 20% of the gross income.

To remember, I just use $100,000 of comp as an example.

20% is 20,000.  That makes the net income $80,000.  20,000/80,000 = 25%.

So max deductible is 20% of gross comp, 25% of net.

So, the owner who makes $25,000 (that is not on W2, Sched C), the max is $5,000.

Let's say a single member business owner earns $25K  (a side gig).

If this is a side gig and this person already has deferrals in another plan, even if unrelated then those deferrals count against the deferral limits.

Many of my side gig clients are already maxed out on deferrals from their regular jobs, so I thought it was worth noting.

So, for the side gig, if there is a viable plan, they could put in a profit sharing up to the 415 limit.

Remember, the deferral limit (402g) is a personal limit.  Regardless of how many pension plans someone is a participant in the amount they defer into all of them combined can not exceed their personal 402g limit.  

As BG stated, that same participant can be involved in multiple plans and each employer can make a contribution on their behalf based on compensation earned up to that plan's 415 limit. 

* don't forget, if one guy has multiple side gigs, you need to consider them all as one gig because of control group rules