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For incorporated business owners, Individual(k)
plan contributions will generally be based on the business owner's
Form W-2. However, incorporated business owners should be sure to reference
the definition of compensation within their plan documents as the exact
definition of compensation can vary slightly from one plan document to the
next. Recall that the maximum Individual(k) plan contribution is comprised of
two components: an employer profit sharing contribution and an employee salary
deferral contribution. (Note: Owners of Subchapter S corporations must base
their contributions on Form W-2 income and may not base Individual(k) plan
contributions on pass through profits.)
Once the incorporated business owner's wages are
determined (or estimated in the case of advance planning), the maximum
Individual(k) plan contribution may be determined as follows.
Step 1: Determine Maximum Profit Sharing Contribution
Maximum Profit Sharing Contribution = .25 x Total Wages*
Step 2: Determine Maximum Salary Deferral
Maximum Salary Deferral = Lesser of Annual Maximum Deferral Limit, plus Catch-Up Contributions, if eligible** or Total Wages
Step 3: Calculate Maximum Individual(k) Plan Contribution
Max. Individual(k) Plan Contribution = Max. Profit Sharing Contribution + Max. Salary Deferral
Note: The maximum Individual(k) plan contribution
may not exceed $46,000 (exclusive of any "catch-up"
contributions) or 100% of Total Wages.
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Example:
John Tanner is the sole owner and employee
of, Tanner Roofing, a Subchapter S corporation. Based on his
tax advisor's recommendation, John intends to draw a salary
of $50,000 (Form W-2 wages) from the company during 2008.
Based on estimated Social Security wages of $50,000 during
2008, John's maximum Individual(k) plan contribution for 2008
would be calculated as follows.
Step 1: Determine Maximum Profit Sharing
Contribution
- Maximum Profit Sharing Contribution = .25 x Total Wages
- Maximum Profit Sharing Contribution = .25 x $50,000
- Maximum Profit Sharing Contribution = $12,500
Step 2: Determine Maximum Salary Deferral
- Maximum Salary Deferral = Lesser of $15,500 plus catch-up contributions, if eligible or Total Wages
- Maximum Salary Deferral = $15,500
Step 3: Calculate Maximum Individual(k)
Plan Contribution
- Max. Individual(k) Plan Contribution = Max. Profit Sharing
Contribution + Maximum Salary Deferral
- Max. Individual(k) Plan Contribution = $12,500 + $15,500
- Max. Individual(k) Plan Contribution = $28,000
Based on estimated W-2 wages of $50,000
for 2008, John could contribute up to $28,000 to an Individual(k)
plan for 2008. In addition, if John were age 50 or older in
2008, he would qualify for a catch-up contribution
of $5,000 in the form of a salary deferral contribution, thereby
bringing his maximum contribution amount up to $33,000.
Note: Because salary deferral
contributions may not be made with respect to compensation
that has already been paid, John must make a written salary deferral
election prior to the time he receives his compensation from
the company.
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©2007 Ascensus, Inc., Brainerd, MN
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