Defined Benefit Plan and Solo 401k Limit

Hi, I am working at two jobs one W2 and one 1099 this year and am thinking about setting up a Cash Balance Plan. I know I have to hirer someone to help set this up but I want to understand some basics first. Can someone help explain to me how this will affect my Solo 401k pretax contributions? I read the limit is 6%, but 6% of what? Here are my rounded numbers:

W2 >$168,000 (maxed out $23k employEE)
1099 Gross Pay $415,000 (separate sole proprietor)
Total Expenses $55,000
Net Income after Pension $360,000
1/2 SE Tax $4800 (360k *0.9235 *0.029 *0.5)
Cash Balance Plan $150,000 (estimated)
Adjusted Net Profit $205,200

So is it 6% of $205,200 = $12,312?

Thank you.

I’m assuming your w-2 job is for an unrelated employer. If you’re already maxing your deferrals in that other plan, why would you have a solo 401k and worry about doing a tiny PS contribution? Not sure it’s worth the trouble and cost. 
 

If you’re doing it for after-tax/roth conversion, maybe it makes sense. 

Im in a high tax bracket and in a high income tax state. I also setup the solo 401k to do MBR option.

If you’re just going to do Roth or convert to Roth in the solo profit sharing plan, just set it up to allow voluntary after tax contributions, contribute that, and convert to Roth. No 6% calc. needed. You just can’t contribute more than your Net Earnings from Self-Employment (NESE).

Otherwise, you take line 31 of your Form 1040 schedule C, subtract 1/2 of your SE tax, subtract the employer contribution and then limit that result to the comp limit under 401(a)(17) to get the “what” that you asked about, which is your NESE. Multiply this by 6% to get the contribution limit (and you of course noticed it was a circular equation as the contribution itself affects the contribution limit.

If you add a DB plan, the contribution to that plan is also included in the equation used to determine the NESE which in turn is used to determine the 6% limit.

Now that you have this, review your calc again. You almost got it - close but no cigar.

Keep in mind that your max DB contribution is limited as well. Its based on your highest consecutive 3-year average NESE. Thus, contributing any deductible amount to the PS plan is hurting the DB limit affecting the DB contribution that the actuary is calculating for you. It’s not uncommon for owner-only combo plans to blow up due to being impatient when waiting for these calcs to be done - to give the owners the amounts that can actually be contributed and deducted. 

Thanks for the detailed explanation. My goal is to contribute to pretax accounts as much as possible.  I think I got it, so for me:

360k - 4820 (SE Tax) - 150k (pension) - $11613 (profit sharing) = $193,565

and $193,565 * 6% = 11,613 thus the circle ⭕️

Question:

”max DB contribution is limited as well. It’s based on your highest consecutive 3-year average NESE. ”

In 2023 I started my business late in the year and my net earning was around $40k.  In 2024 you can see in my OP net earning is $360k.  Since I only have a partial year and one whole year how does the 3 year average calculation work?

thank you.

If 2023 will be included as a year of service, then the actuary will likely take the NESE from 2023 plus the $193,565 for 2024 and divide by 2 years. I assume the $150,000 contribution is achievable based on your age, service, your average NESE, and the currently applicable funding interest rates published by the iRS. We will leave that determination to the enrolled actuary and the terms of your DB plan document.