415 limits
The situation: Dr is an employee of a hospital and is deferring the maximum of 16500 to the 403(b) plan. He also moonlights on the side as a sole proprietor and reports that income on schedule A. His wife is on the payroll of the moonlighting business. Her compensation is $17,867 which is $16,500 grossed up so she can pay her FICA tax and have $16,500 remaining to defer into the 401(k)/Profit sharing plan sponsored by the moonlighting business. Question 1. Can the moonlighting plan make a profit sharing contribution for the wife and not violate the 415 limit? Question 2. If so, is there a limit on that contribution? Question 3. If the wife is not eligible to receive the profit sharing contribution, or is restricted in some manner, must the doctor’s percentage of the profit sharing contribution equal the wife’s percentage of the profit sharing contribution?
Thank you very much!
Permalink Submitted by mk foss on Tue, 2011-03-01 18:59
The moonlighting business can make a profit sharing contribution of up to 25% of the spouse’s salary even though she is deferring $16,500. The business owner must do the same percentage. Because this is (I presume) a Schedule C business – his contribution will be the profit (after deducting the 17k+ to the spouse and the profit sharing contribution to the spouse) less 1/2 of his SE tax times 20%. The 20% is the equivalent of 25% after deducting the 25%.
Permalink Submitted by Robert E Burk on Tue, 2011-03-01 21:18
Thank you for the response. My concern is based on the 2010 tax facts question 379. It states that annual additions may not exceed 100% of compensation. It continues by defining addtions as the sum of empoloyee contributions, employer contributions and forfeitures. If the wife defers $16,500 and the employer throws in a p/s contribution of $4,467 (25% of her salary of $17,867) isn’t that then exceedng her 100% of compensation for the purposes of the 415 limit?