Maximum Retirement Contribution

Submitted by Marina Ferrone on Tue, 2022-08-02 19:36

W-2 Wages = $100,000 from an S-corp. Taxpayer deducts $57,000 as pension expense on 2020 corporate return. Isn’t this overstated? No employee deferrals present on W-2. Isn’t contribution limited to 20% of wages? To correct this, don’t we need to amend all the returns for the excess contributions deducted in 2020?



Submitted by William Tuttle on Wed, 2022-08-03 03:01

Employer contributions are limited to the lessor of the statutory limit (2020 = $57K) or 25% of compensation.

  • 25% of W-2 Box 1 wages, or
  • 20% of net earnings from self-employment (self-employed earned income) = business profit – 1/2 SE tax.
  • For this S-Corp 2% shareholder employee, maximum employer contributions would be $100K * 25% = $25K.
  • There were $57K – $25K = $32K in excess employer contributions.
  • You would first have to amend any year with excess employer contributions to only deduct the allowed amount.
  • Then a Form 5330 with a 10% excise tax penalty on any non-deductible balance would be required every year until removed or reconciled with available contribution space.
  • You didn’t indicate whether this was a SEP IRA or a 401k.
  • SEP IRA excess employer contributions and earnings can be returned at anytime.
  • Generally, 401k excess employer contributions can not be returned after the end of the tax year they are for. They can only be reconciled with new available contribution space or when ordinarily distributable but subject to taxation and if applicable the early withdrawal penalty
  • This is a serious compliance error that needs to be remedied immediately.

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