Expert: Allen - 2/1/2010

Question
Hi Allen,
A sole proprietor has two plans DB and PS/401k and whose schedule C income is over $245,000. DB plan has a contribution range min and max and if sole proprietor wants to contribute maximum allowable in DB plan plus 6% in PS plan and $16,500 in 401k. Is it allowed or he will violate a 404 limit because he is contributing more than minimum allowed in DB plan? Or if he contributed more than minimum in DB then 25% limit will apply.
Thanks.

Answer
My understanding of the rules is that you can deduct the actual contribution to the defined benefit plan (as long as it is less than the maximum deductible amount) + 6% of compensation + $16,500. You can deposit more than the minimum required amount to the defined benefit plan and take the other deductions.

One thing to be careful about. Compensation for plan purposes is defined as net Schedule C income reduced by the Self Employment Tax paid on that income and also reduced by the defined benefit and profit sharing contributions (but not the 401k contribution). So net Schedule C income will have to be substantially more than $245,000 to use $245,000 in the calculations.