Solo 401(k) for spousal owned business – maximum contributions limited by W-2 wages; proportional ER contributions
Wife and husband own business 50/50. No other employees. Two questions I am trying to find a definitive answer to:
1. Husband took about $24,000 of wages during 2023. He made the maximum elective deferral of $22,500. Can a 25% employer contribution of $6,000 (W-2 wages of $24,000 x 25%) be made for him OR are his total contributions (deferrals + contributions) limited to $24,000 (so $22,500 of deferrals and $1,500 of employer contributions) by his W-2 compensation?
2. Do employer contributions to the wife and husband’s plan need to be made at the same % of their wages for both of them? I would think yes, but I read something on solo 401(k) (obviously not an official cite…) that said they did not need to be made at the same rate.
Permalink Submitted by David Mertz on Wed, 2024-02-21 14:56
With a W-2 being issued, presumably this is an S-corp (or possibly a C-corp).
1) Total additions are limited to 100% of compensation, in this case $24,000 for Husband.
2) For an employer profit-sharing contribution, the same percentage must be used for initially determining the employer contributions, but after that the total-additions limit must be applied. So it’s possible that the employer contribution for Wife could be equal to 25% of Wife’s wages (if Wife’s elective deferrals are no more than 75% of compensation) even though the employer contribution for Husband is only $1,500 so as not to exceed the total-additions limit for Husband.
Permalink Submitted by Cassandra Lenfert on Wed, 2024-02-21 16:30
Interesting. It is an S corp. I will have to look at the total-additions limit to try to understand that. The wife’s wages were about $54,000.They have made too big of an employer contribution for the husband so they are going to have to withdraw some of that (or possibly carry it over to be used in 2024.)