Author Topic: 401(k) - Can I Do Employer Contributions Before Employee Salary Deferral?  (Read 655 times)

Malum Prohibitum

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Mustachians,

Google does not lead me to an answer on this question.

I own my own corporation.  I have a 401(k).  I am currently the sole employee and anticipate being so for all of 2018.

I understand that for 2018 I can defer salary of $18,500 plus catchup contribution of $6000, for $24,500.

I also understand that my corporation can place a maximum of $36,500 so that the total for 2018 is not greater than $61,000 ($55,000 plus catchup provision of $6000).

Now let's assume I am not going to put in $61,000.

May I favor employer contributions?  The reason is that salary deferral is still subject to payroll tax, while the employer contribution is not. 

Let us assume I am paying myself a salary that does not max out the income cap on payroll taxes.  To make math easy, let's say a salary of $80,000. 

The employer contribution is limited by 25% of that amount, right?  So $20,000.

This is where most Google returns say "$20,000 plus $24,500 means a maximum in your 401(k) of $44,500 for 2018." 

What if I just wanted to put in the employer contribution of $20,000 and no salary deferral?  Or what if I wanted to put in $20,000 for employer contribution and maybe only $15,000 of employee contribution?

Does this violate any rules?

Am I missing some piece of crucial information?

jlcnuke

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These FAQ's I think cover most of what you're asking. Pub 560 has the calculations for determining what you can contribution how. https://www.irs.gov/retirement-plans/one-participant-401k-plans

Malum Prohibitum

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jlcnuke,

Thank you for answering, but that link provides the same sort of hypothetical answer I provided above, Ben put in $24,500 of deferrals plus 25% of his W-2 compensation, or $12,500, for a total of $37,000.  That is not what I want to know.

Here is what I want to know:
Could Ben put in just the $12,500 in business contribution and nothing in salary deferral?  Or $12,500 in business contribution but only $10,000 in salary deferral?

That is my question.  Can a self employed corporation owner favor the business contribution over the salary deferral?

harvestbook

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I use a solo 401k and my understanding the 25 percent match is just that-- a match. If there is no employee salary deferral, there can be no employer match.

Boll weevil

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Maybe. I seem to recall a post somewhere in these forums within the last year from a lawyer who's firm was making contributions equal to the max the employee could make regardless of how much the employee saved. I've done some searching and haven't been able to find it though.

I've done some web searching, and the comments in this article seem to indicate it is possible:
http://www.mymoneyblog.com/401ks_how_does.html
One of the commenters says his company make a contribution regardless of whether the employee saves, and another comment claims they're getting a 2:1 match (i.e. the company contributes 2 dollars for every dollar the employee saves). Keep in mind the article is from 2006 so the rules may have changed since then.

If you're the sole employee, have you considered doing a SEP IRA?