Schedule C compensation

I have a solo 401(k) participant that has $0 Schedule C compensation and is age 55. Is the allowable deferral $0 or $6,000? 

I cannot seem to find anything on this. 

Thanks!!

if he has no comp, where does the $6000 come from?

sched C income gets split between comp, fica and contributions and if it is 0 there is nothing to split.

$6,000 is the catch-up, but I cannot seem to wrap my head around deferring on $0 comp. 

any thoughts or regs? I sure appreciate any help.

no comp = no deferrals or catch up

From 1.414(v)-1(c)(1):

Quote

However, an elective deferral is not treated as a catch-up contribution to the extent that the elective deferral, when added to all other elective deferrals for the taxable year under any applicable employer plan of the employer, exceeds the participant's compensation (determined in accordance with section 415(c)(3)) for the taxable year.

This gets complicated; at a certain very low level, you no longer get the catch up amount.  The answer here is zero, but if you work through the examples if the following, you will see how the math works.

2.e. Catch-up contribution may not exceed compensation. A participant’s catch-up contributions cannot exceed the excess of the participant’s section 415 compensation (i.e., compensation as defined in IRC §415(c)(3)) over any other elective deferrals for the year which are made without regard to the catch-up provisions. See IRC §414(v)(2)(A)(ii) and Treas. Reg. §1.414(v)-1(c)(1). This rule will rarely come into play because the participant will reach the catch-up dollar limit, as described in 2. above, long before the employee is out of compensation to defer. However, it is possible for a lower income individual who is in a financial position to defer his or her entire compensation, particularly in light of the fact that the IRC §415(c)(1)(B) limit is 100% of section 415 compensation (which is determined prior to the reduction of compensation for the 401(k) deferral).

2.e.1) Example - employee’s compensation is less than the normal deferral limit under IRC §401(a)(30). A low-paid employee earning $10,000 per year is in a financial position (e.g., because of significant other household income) to defer 100% of that compensation under a section 401(k) plan. The participant’s section 415 compensation, reduced by his elective deferrals of $10,000, is zero. Therefore, this participant’s catch-up limit is zero, unless any portion of the $10,000 already deferred exceeds some other applicable limit under the plan, since $10,000 does not exceed the section 401(a)(30) limit.

2.e.2) Example - plan-imposed limit. Suppose the plan in the prior example had a plan-imposed limit equal to 15% of compensation. In that case, the participant might be able to use the catch-up limit. The regular deferral limit in the plan for the participant would be $1,500 (i.e., 15% of $10,000), leaving $8,500 of compensation. If the plan allows for catch-up contributions, the participant could defer an additional amount, not exceeding the catch-up limit for that year. Thus, if the catch-up limit in effect for the year is $5,000, the employee could defer up to $6,500 (i.e., $1,500 plan-imposed limit plus the $5,000 catch-up limit). The employee also could receive other annual additions (e.g., matching contributions, allocation of employer nonelective contributions and/or forfeitures) up to $8,500 because the catch-up amount is not subject to the IRC §415 limit. See the discussion in 3. below regarding how the catch-up limit interacts with other limits applicable to the plan.

2.e.3) Example - self-employed individual. The prior to examples assumed the individual is a W-2 employee. How is the analysis different for a self-employed individual? Suppose a self-employed individual has only $10,000 of net earnings from self-employment (after the deduction under IRC §164(f) for one-half of the self-employment taxes), but is in a financial position that they would like to maximize their annual additions to the plan. What options are available. If employer contributions are made (e.g., discretionary profit sharing contribution), each dollar of contribution will reduce the net earnings by one dollar to reach the earned income definition under IRC §401(c). Thus, a contribution of only $5,000 would be permissible, since the resulting earned income of $5,000 could support only $5,000 of annual additions under IRC §415(c). But if the self-employed individual makes elective deferrals to a 401(k) arrangement, the elective deferrals do notreduced the earned income definition. This rule allows the individual to defer an amount not exceeding $10,000. Elective deferrals in the amount of $10,000 would still result in earned income of $10,000, so the 100% annual additions limit under IRC §415(c) is not exceeded. Note, however, that none of the $10,000 would be a catch-up contribution because it doesn’t exceed a statutory limit (see 3. below). If the plan had a plan-imposed limit, then the catch-up rules might come into play, but a self-employed individual wouldn’t have a plan-imposed limit in his/her 401(k) plan.

Cross-reference tip. For more information on the interaction between deductible contributions and a self-employed individual’s earned income, see Section XVI, Part H, of Chapter 7. For more information on the IRC §415(c) limit, see Section II of Chapter 5.