Limitations on Maximum Solo 401K Contribution for Low Wage Earners

Oct 11, 2012 3 Replies
W

I am studying Solo 401K plans for corporations with a single employee and shareholder. The rules allow an employee over 50 to elect to defer $22.5K in 2012. In addition, the rules seem to allow the corporation to do a profit share of 25% against gross wages (W-2 wages not corporation net income). I was putting together a table to show maximum deferrals at different salary levels, and I ran into an interesting case. What if the S-Corporation's sole employee makes $25K gross wages and defers $22.5K. The rules seem to suggest that the employer can still do a profit share of



25% against $25K wages, or $6,250. $22.5K + $6250 = $28,750, which is more than the employee's gross salary.

Is such a case possible, or is there some additional limitation so that the deferral plus the profit share can never exceed the gross wage?


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M

Without looking anything up, I believe the amount allowed is the smaller of

1) the actual net income for SE purposes

and

2) the larger of a) the salary deferral amount and b) the 25% calculation

So it would never exceed the actual wage.

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M

Oops, it's a corp with an employee, so change "net incomne for SE purposes" to "wage".

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A

This may be a duplicate post:

Mark is correct that you can't exceed wages.

The calculation is as follows:

Regular salary deferral is just like any 401K = maximum of $22,500 (age

50) or gross wages whichever is less. Company profit contribution = 25% of wages. Wages is defined as the amount on the W-2 in Box 1. This would translate to gross wages less the 401K salary deferral.

In the example given for someone who is age 50 with gross wages of $25,000, that would come to $22,500 + ($25,000 - $22,500) x 25% $22,500 + 625 = $23,125.

Assuming much more income, the maximum contribution in 2012 could not exceed $55,500 for someone age 50.

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