Solo 401k / Employer Sponsored 401k Contribution

[atn1kxf]

My wife starts a new job next week as an employee for a company she's been an independent contractor for the last three years.  During this three-year time period, she opened and contributed to a Solo 401k.  I have read that the IRS allows a contribution to both plans only if the businesses you work for have no legal overlap or affiliated relationship.  Does this mean, she will not be allowed to make contributions to her Solo 401k for work she did earlier this year prior to becoming an employee of the company?  Note: I’m not clear if this makes a difference, but when she was an independent contractor, she was paid by a third-party staffing company on behalf of the employer.

[bacchi]

The overlap only applies to the employER contribution maximums, like profit-sharing or matching. Your wife can contribute as an employEE to both plans as long as she stays under the personal maximum ($19,500) combined.

Since the new W2 company is affiliated with the staffing company and her former contract, I wouldn't test the employER maximum. Stay under the $58k total.

[dandarc]

Do y'all have a link to details on this? I was unaware of this and I took (kinda forced into?) a W-2 contract last year with a 1099 customer when they told me renewing contract was not an option. I think I'm under the $58K limit, but I didn't actually verify that - doing that forthwith.

[Chris @ Saturday Financial]

Disclaimer: This is not tax advice, but merely information that should be verified with a CPA and/or directly with the IRS...

There is a lot going on here.

1) In 2021 elective deferrals across all 401(k) plans are limited to $19,500 per person, or $26,000 if the person is 50 or older. Being eligible for both a Solo 401(k) and an employer sponsored 401(k) does not increase the annual limit on elective deferrals.

2) Separate from elective deferrals, a person can make employer nonelective contributions to their Solo 401(k) plan and receive such contributions from their W2 employer. In 2021 the total limit for elective deferrals and employer nonelective contributions is $58,000 per plan. (This doesn't include elective deferral catch-up contributions.)

3) The OP stated, "I have read that the IRS allows a contribution to both plans only if the businesses you work for have no legal overlap or affiliated relationship." I think the OP was referring to controlled group rules. Those rules do not actually apply to his wife's situation. (Controlled group rules are for people who own multiple business. They don't apply to people who own one business but also work for a separate business as a W2 employee.)

Further reading:

https://www.irs.gov/retirement-plans/one-participant-401k-plans

https://www.kitces.com/blog/coordinating-contributions-multiple-employer-sponsored-defined-contribution-plans-401k-defined-benefit/

https://www.irafinancialgroup.com/learn-more/solo-401k/solo-401k-plan-controlled-group-rules/

[atn1kxf]

Thanks everyone for the great advice and clarification!