Sole Prop - 25% PS and max deferral

I have a sole prop plan with a small earned income amount. There are no other employees in the plan.

Owner is over 50 and catch-up eligible

Net earned income after Sec. 164(f) deduction is $23,589.75.

25% PS contribution is $4,717.95.

Plan comp is now $18,871.80.

What is he eligible to defer? My thoughts are that it would be $18,871.80, but our testing software is coming up with 402(g) and 415 limit excess amounts with these amounts.  What am I missing?

Sorry if this obvious. My brain doesn't seem to be working today.

I agree with you. It appears as if your software is not recognizing the participant as being catchup eligible for whatever reason.  Just to ensure we're on the same page semantically, you're saying the owner's net earn income immediately before being reduced by employer contributions to his own account is $23589.75.

If this is the case, then an employer contribution of $4717.95 would then reduce his earned income from self employment to $18,871.80.  That $4717.95 is fully deductible since it's 25% of $18,871.80.  Normally, a deferral of $14,153.85 would put him at 100% of Compensation, but the fact he is catchup eligible would increase that limit.

Good Luck!

Yes. Net earned income before ER contribution is 23,589.75.  The 25% ER contribution reduces his self employment income to 18,871.80.  Unless my logic is is flawed today, 18,871.80 would be the max deferral. In essence zeroing out comp. 4,417.95 would be considered catch-up.

I agree with 18,871.80 for the deferral but I think the catch-up is 871.80

Assuming a calendar year plan, 402(g) triggered catch-up is $871.80.  415 triggered catch-up would be $3,546.15, for a total catch-up of $4,417.95.

How much does your software say is in excess of 402(g) and 415?  If it's small amounts, it may be getting a larger SE tax number.

Why don't you try ignoring the PS and put $24,000 elective deferral in your software and see what it says (should be $24,000 deductible)?

8 minutes ago, Flyboyjohn said:

Why don't you try ignoring the PS and put $24,000 elective deferral in your software and see what it says (should be $24,000 deductible)?

It should say he exceeds 402(g) by $5,128.20.  Deferrals in excess of Section 415(c)(3) compensation are not treated as catch-up. 1.414(v)-1(c)(1).

If Profit Sharing is $0, 401k should be $23,589.75. (You said $23,589.75 after SE deduction, right?)

Why would you make a PS contribution?