Parker Elmore, ASA, MAAA, EA, FCA
The rules for Solo 401(k) plan contributions and their deadlines can be confusing if you’re not familiar with the intricate workings of the IRS regulations. But it’s actually simpler than you might think. Every plan is different depending on your business type, but surprisingly they’re all very similar.
If your business is a sole proprietorship, a single or multiple-member LLC, the rules are essentially the same for both employee deferral contributions and profit sharing contributions.
For employee deferral contributions, owners under the age of 50 can make contributions of 100% of their income up to $18,000 to their solo 401(k) plan. If the owner is age 50 or over, they can contribute up to an extra $6,000 for a total of $24,000 in contributions. You must formally elect to make a contribution by the end of the calendar year, but you don’t have to make it by then. As the plan owner in any of these types of companies you have until your tax-filing deadline (April 15th following the year-end) to actually make your contribution. Additionally, you can use either pre-tax or after-tax (Roth) funds to make your employee deferral contributions
Sole Proprietorship or Single-Member LLC
The rules start to vary a little bit with profit sharing contributions, but they are still relatively easy to understand. If your business is a sole proprietorship or
a single-member LLC, your business can make annual profit sharing contributions to your solo 401(k) plan on behalf of you and your spouse. Contributions as an employer are limited to 25% of earnings and Schedule C sole proprietors must base their maximum contribution on earned income, which is an additional calculation that lowers your max contribution to 20% of earned income.
If your business is a multiple-member LLC, you may make annual profit sharing contributions to a solo 401(k) plan on behalf of business owners limited to 25% of earnings subject to self-employment tax.
Just like the employee deferral contributions, all profit sharing contributions must be made by your tax-filing deadline. Unlike the employee deferral contributions however, employer profit sharing contributions must be made in pre-tax form.
C or S Corporation
However, if your business is a C or S corporation, things are slightly different. You and any employees can make a deferral contribution at any time of the year. Safe harbor guidelines from the Department of Labor mandate that deferral contributions to the 401(k) plan must be made within seven business days of the deduction from an employee’s check. However, you and your employees have both pre-tax or after-tax (Roth) options for such contributions.
Your corporation can also make profit-sharing contributions for both owners and employees, but total contributions on the corporation’s behalf are limited to 25% of compensation paid. Again, any profit sharing contributions must be made before the tax-filing deadline and in pre-tax form.
For all four of these kinds of companies, your maximum employer and employee combined contribution limit is $53,000 for employees under the age of 50 and $59,000 for those age 50 and over. Additionally, if you participate in more than one 401(k) plan, your maximum contribution as an employee is still $18,000 for the year, but the profit sharing or employer contribution is limited on an employer basis. This is because elective deferral limits are individual limits while profit-sharing or employer contributions are limited on an employer basis.
**Compensation is defined as net earnings from self employment activities, taking into account deductions for half of self employment tax and for contributions on your behalf to your 401(k) plan.