401k and Profit Sharing Plan

A small business owner may be able to add a 401k salary deferral and a profit sharing plan to the defined benefit plan. The 2018 401k contribution limit is $18,500 and $24,500 if age 50 or older. The 2019 401k contribution limit increases to $19,000 and $25,000 if age 50 or older. Funding the 401k is completely discretionary. You can stop, decrease or increase your salary deferral contributions up to the salary deferral limit.

Note: When paired with a defined benefit plan the profit sharing contribution is limited to 6% of compensation.

The 2018 profit sharing plan contribution limit is $16,500 based on the 2018 compensation limit of $275,000 X 6%. The 2018 IRS maximum compensation used to calculate defined benefit contributions is $275,000. The 2019 profit sharing plan contribution limit is $16,800 based on the 2019 compensation limit of $280,000 X 6%. The 2019 IRS maximum compensation used to calculate defined benefit contributions is $280,000.

Small business owners and corporations with W-2 employees who are considering adding a 401k to their defined benefit plan should consider a safe harbor 401k. By making a matching contribution the plan will pass the non-discrimination testing. As a result, owners and highly compensated employees can contribute the annual deferral amount $18,000 ($24,000 if age 50+) to a 401k plan regardless of the whether or not the employees contribute to the 401k.

Why add a 401k salary deferral to a Defined Benefit Plan?

There are 2 primary reasons to add a 401k salary deferral option.

1) A salary deferral option can be added to maximize annual tax deductible contributions. 401k salary deferral contributions are in addition to Defined Benefit Plan contributions.

2) A salary deferral option can be added to increase annual flexibility.

I am age 50 and I participate in a 401k through my primary employer and I contribute the maximum salary deferral of $25,000 in 2019. I also have a side business which is a single member LLC and makes $200,000 in net income and I would like to maximize my tax deductible contributions to a retirement plan. Can I have a Defined Benefit Plan?

Yes. You are eligible to establish a Defined Benefit Plan for a side business even if you participate in a 401k, 403b, 457 or Thrift Savings Plan through your primary employer.

I am age 50 and I participate in a 401k through my primary employer and I contribute the maximum salary deferral of $25,000 in 2019. I also have a side business which is a single member LLC and makes $200,000 in profits per year and I would like to maximize my tax deductible contributions to a retirement plan. Can I add the salary deferral option to my Defined Benefit Plan and contribute another $25,000 in salary deferrals?

No you can not. It is important to note that contributions made to the employer’s 401k, 403b or Thrift Savings Plan will impact the salary deferral limit for the 401k contribution for the Defined Benefit Plan. Contributions to the employer’s 401k, 403b or TSP count towards the 2019 401k salary deferral limit of $19,000 ($25,000 if age 50 or older). Contributions made into a 457 plan do not count towards the salary deferral limit.

I am age 50 and I participate in a 401k through my primary employer and I contribute the maximum salary deferral of $10,000 in 2019. I also have a side business which is a single member LLC and makes $200,000 in profits per year and I would like to maximize my tax deductible contributions to a retirement plan. Can I add the salary deferral option to my Defined Benefit Plan and contribute another $25,000 in salary deferrals?

Yes, you could make a salary deferral contribution, however contributions made to the employer’s 401k will impact the salary deferral limit for the 401k contribution for the Defined Benefit Plan.

Example: Jennifer is age 50 and works as a W-2 employee for ABC accounting firm and contributes $10,000 to the 401k in 2019. In addition to working at the accounting firm, Jennifer is self employed and the owner of an S corporation. She is the only employee and pays herself a $100,000 W-2 salary.

Jennifer could setup a Defined Benefit Plan and could add the salary deferral feature. Based on this information Jennifer would be eligible to make a contribution of $15,000 in salary deferrals (the $10,000 contribution to the ABC accounting firm 401k counts toward the 2019 $25,000 salary deferral limit). In addition to the 401k contribution, Jennifer can also make a contribution to her Defined Benefit Plan.

Can I add a Profit Sharing Plan and a 401k plan to a Defined Benefit Plan?

Yes potentially. When paired with a defined benefit plan the profit sharing contribution is limited to 6% of compensation. Profit sharing contributions are made by the corporation and are generally 100% tax deductible as a business expense.

The 2018 profit sharing limit is $16,500 which is based on the 2018 income limit of $275,000 X 6%. The 2018 IRS maximum compensation used to calculate defined benefit contributions is $275,000.

The 2019 profit sharing plan contribution limit is $16,800 based on the 2019 compensation limit of $280,000 X 6%. The 2019 IRS maximum compensation used to calculate defined benefit contributions is $280,000.

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Beacon Capital Management Advisors provides defined benefit plans to the self employed, entrepreneurs, independent contractors and small business owners and is registered in all 50 States. Contact us if you have questions and need advice or if you would like to receive a defined benefit plan proposal.