Do overall 401(k) contribution limits sum across employers?

Question

Assume I have a day job that has a 401(k) with no matching and I am also self-employed. I'm considering structuring my side business as an S corp and setting up a solo 401(k) in addition to the 401(k) from my day job. I'm interested in putting the absolute maximum away in a tax-deferred manner, but I'm confused by contribution limits. It is not the case, but for this discussion, assume my income from each source is large enough not to be a limiting factor.

1) I understand that there's a maximum of $18,000 of elective contributions across all 401(k) plans, so my S corp wouldn't help that, but it seems like the employer contributions for an S corp are not limited except by the $53,000 limit for elective plus employer contributions. My question is whether this limit sums across plans or not. In other words, which of these is the best I can do?

• A. $18,000 (elective) at my day job and then $35,000 (employer) at my S-corp
• B. $18,000 (elective) at my day job and then $53,000 (employer) at my S-corp

2) I am also considering employing my wife at the S-corp. In principle, could I contribute my $18K at work, then set aside $53K for myself through the S-corp and $53K for her (so the total is $124K)?

3) There is some mention of sole proprietorship and LLC's not being able to contribute an amount that is more than 25% of an employee's compensation. But for regular employers, the limitation is 100% of compensation. I can't seem to tell which limitation would apply to an S corp I would create that would then employ me (and perhaps my wife). Would I be limited to 25% of my compensation?

So no one mentions it, I am also aware of the option to contribute $11,000 to a traditional IRA (non-deductible at my income level) and then rolling into a Roth. But that action doesn't seem to interact with any of my 401(k) stuff.

Answer 1

Let me first start off by saying that you need to be careful with an S-Corp and defined contribution plans. You might want to consider an LLC or some other entity form, depending on your state and other factors.

You should read this entire page on the irs site: S-Corp Retirement Plan FAQ, but here is a small clip:

Contributions to a Self-Employed Plan You can’t make contributions to a self-employed retirement plan from your S corporation distributions. Although, as an S corporation shareholder, you receive distributions similar to distributions that a partner receives from a partnership, your shareholder distributions aren’t earned income for retirement plan purposes (see IRC section 1402(a)(2)). Therefore, you also can’t establish a self-employed retirement plan for yourself solely based on being an S corporation shareholder.

There are also some issues and cases about reasonable compensation in S-Corp. I recommend you read the IRS site's S Corporation Compensation and Medical Insurance Issues page

answers as I see them, but I recommend hiring CPA

1. You should be able to do option B. The limitations are in place for the two different types of contributions: Elective deferrals and Employer nonelective contributions. I am going to make a leap and say your talking about a SEP here, therefore you can't setup one were the employee could contribute (post 1997). If your doing self employee 401k, be careful to not make the contributions yourself.

2. If your wife is employed the by company, here calculation is separate and the company could make a separate contribution for her.

3. The limitation for SEP in 2015 are 25% of employee's compensation or $53,000. Since you will be self employed, you need to calculate your net earnings from self-employment which takes into account the eductible part of your self employment tax and contributions business makes to SEP.

Good read on SEPs at IRS site. and take a look at chapter 2 of Publication 560.

I hope that helps and I recommend hiring a CPA in your area to help.