Case Situation

The Tax Payer (TP) (Current Age: 64 but will be 65 in July 2018) has been working for 17 years in a large US Corporation in the Tri-State area. Prior to that he was working for another large US Corp for 12 years. He has been participating in the 401(k) plan for both the employers with matching contribution by the employer. He intends to leave the balance in each 401(k) a/c with the respective employer.

Recently, effective July 31, 2017, the TP voluntarily retired with a mutual agreement and was offered a severance package. The TP will continue to be paid severance salary for 17 months until Dec. 31, 2018.

However, effective Aug. 1, 2017 the TP will not be able to participate in the employer’s 401 (k) plan at all. But the TP has already maxed out $18,000 + $6,000 catch-up 401(k) contribution for 2017. So no further action is required in respect of 2017 contribution to 401(k) plan. For 2017, the TP will get a W-2.

2018

The TP will continue to receive “severance salary continuation” for the entire 2018 calendar year and the monthly gross pay is $10,900 and the net pay (after deducting Federal, State Taxes and Social Security/Medicare taxes,) is $6,000. The TP is not eligible to participate in the employer’s 401(k) plan in 2018. The employer has clarified and confirmed that the TP will be issued a W-2 for 2018 and the Agreement identifies the TP as an “Employee-Consultant” BUT no rights whatsoever of an employee. The TP is unlikely to get 1099-Misc but instead will get a W-2 for 2018.

Medicare & Social Security

The TP will register for Medicare in April 2018 as mandated by the Medicare Rules. At full retirement age of 66 (July 2019), the TP will be entitled to receive a monthly social security benefit of about $2,500 per month.

Private Professional Practice

The TP is a professional and owns a one (Single) member/owner LLC/PLLC. He will continue to engage in the professional practice for which he will need to file IRS Sch. C for his Tax Return. The TP may continue this practice in 2019 and beyond.

Clarifications Required

(1) The TP wants to make maximum allowable contribution to his 2018 Retirement out of $130,000 he is going to receive as “salary continuation” as an “employee-consultant” from his ex-employer during 2018.

(2) What are the options available to the TP in 2018 to contribute the maximum to his retirement plan and with whom?

(3) Can any retirement plan be set up for his LLC/PLLC but use the funds for retirement contribution from $130,000?

(4) Can “salary continuation” amount of 2018 (gross amount approx. $130,000) from the employer be shown as a base for retirement plan contribution? (The TP may not have enough earnings in his LLC/PLLC in 2018 to make available funds for contribution of $24,000 which he used to make with the employer until 2017)

(5) What are the IRS Rules in this regard and what all IRS Forms need to be filed?

(6) The TP is willing and able to contribute $24,000 or even more as his retirement plan contribution for 2018 mainly out of $130,000 of his salary continuation amount.

(7) From 2019 and beyond, there may not be a need for retirement plan contribution unless the LLC/PLLC business suddenly gets a very large income.

(8) If a private Retirement Plan is set up, does it mandate to have annual contribution every year?

Key Points:

(1) Source of Funds: Severance Salary continuation of $130,000 during 2018.
(2) No 401(k) participation eligibility for 2018 with the ex-employer
(3) Save in 401(k) or Retirement Plan of at least $18,000 + $6,000 = $24,000 during 2018 out of severance salary of 1 above.
(4) Can Severance Salary continuation for 2018 (but shown in W-2) be shown as consulting income for TP’s Single Member LLC/PLLC and be used as a base for setting up self-employed retirement plan?