How to maximize solo 401k contribution

[djoseph]

Hi, I'm a first time poster and new member. Thanks in advance for your help. I would like to get advice on the most efficient ways of getting to the $56k max contribution for a solo 401k. I am a solo practitioner and file as an S-corp. I have three part-time employees none of which work more than 1,000 hours a year. I used to use an SEP plus a 403b a few years ago, but left the 403b job and am 100% on my own now. I rolled everything into a solo 401k so I can do a backdoor Roth contributions every year.

It's my understanding that for a solo 401k after I contribute the $19k as the employee of the S-corp, I need to get the employer contribution to $37k to reach $56k. I understand the employer contribution is limited to 25% of Box 1 on my W-2. This means I would have to pay myself $148k. Of course at the same time I want to minimize my W-2 income to save on taxes (while still doing right by the IRS).

My specific questions are:
Can I add HSA contributions and health insurance paid by the S-corp to my W-2 amount prior to calculating the 25%?
Are there any other things I can add to the W-2 amount to boost my employer contribution without increasing taxes?
Is there a simple formula to find the "sweet spot" amount for the W-2 box that will be the most tax advantageous, taking into consideration the tax benefit of a large employer contribution and the tax liability of a higher W-2?
Should I be going in a completely different direction with this, e.g., hire someone to do a formal 401k? Would I be better off as sole-proprietor which has different rules about max employer contributions to solo 401ks (though I would lose the tax advantages of the S-corp)? Also, I could easily form a second entity (my practice has more than one revenue stream) with a second solo 401(k) and have a second employee contribution of $19k, but I would still have to pay taxes on that compensation.

Thank you.

[jacoavlu]

Who does your payroll?

health insurance premiums and HSA contributions can be included in W2 box 1 Comp and excluded from FICA if you do it right

[spiritrider]

• Hopefully, you do not have your one participant 401k at Vanguard which does not support employee eligibility restrictions* and if you have a one-participant 401k plan document/adoption agreement that allows such restrictions*, you elected them.
• There is only one employee deferral limit across all 401k, 403b or SIMPLE IRA plans. Also, more than one business entity would be considered a controlled group and you would still be limited to a single annual addition limit.
• An ERISA qualified 401k plan would provide you with no additional contribution space.
• A one-participant 401k that supports employee after-tax contributions, an in-plan Roth rollover (IRR) and/or an in-service rollover of such. Would allow you to reach the annual addition limit with lower W-2 compensation. This would be at the loss of deductible employer contributions. Based on you lack of understanding of basic 401k contribution limits and compliance issues.. You will most definitely want to use a professional TPA for any such plan.
• Whether an S-Corp or sole proprietorship is the best choice is based on your specific facts and circumstances. These include; your state of domicile, your gross business profits** ex-payroll costs, your QBI eligiblity, etc...

*In case you are unaware. The SECURE Act extended mandatory employee eligibility to employees with >= 500 hours/year with three years of service. This provision starts counting the three years on 1/1/2021 and will be effective on 1/1/2024.

**@jfoxcpacfp routinely estimated the crossover point at ~$320K prior to/ineligible for the QBI deduction and ~$400K eligible for the QBI deduction

[djoseph]

Who does your payroll?

health insurance premiums and HSA contributions can be included in W2 box 1 Comp and excluded from FICA if you do it right

A local payroll company does my payroll.

I thought that was the case with HSA and ins. premiums. Thank you for confirming.

[djoseph]

• Hopefully, you do not have your one participant 401k at Vanguard which does not support employee eligibility restrictions* and if you have a one-participant 401k plan document/adoption agreement that allows such restrictions*, you elected them.
• There is only one employee deferral limit across all 401k, 403b or SIMPLE IRA plans. Also, more than one business entity would be considered a controlled group and you would still be limited to a single annual addition limit.
• An ERISA qualified 401k plan would provide you with no additional contribution space.
• A one-participant 401k that supports employee after-tax contributions, an in-plan Roth rollover (IRR) and/or an in-service rollover of such. Would allow you to reach the annual addition limit with lower W-2 compensation. This would be at the loss of deductible employer contributions. Based on you lack of understanding of basic 401k contribution limits and compliance issues.. You will most definitely want to use a professional TPA for any such plan.
• Whether an S-Corp or sole proprietorship is the best choice is based on your specific facts and circumstances. These include; your state of domicile, your gross business profits** ex-payroll costs, your QBI eligiblity, etc...

*In case you are unaware. The SECURE Act extended mandatory employee eligibility to employees with >= 500 hours/year with three years of service. This provision starts counting the three years on 1/1/2021 and will be effective on 1/1/2024.

**@jfoxcpacfp routinely estimated the crossover point at ~$320K prior to/ineligible for the QBI deduction and ~$400K eligible for the QBI deduction

*I have a one-participant 401k through TDAmeritrade and have elected such restrictions.
*Good to know about all the other useful points you bring up. It seems like the crux is that you lose the immediate tax deduction but gain the maximal contribution with a lower W-2 by using an IRR.
*Yes, I would like a TPA. Do people usually use a local person or are there national, low-cost operators that are good?
*Very good to know about the SECURE Act now.
Thank you!

[spiritrider]

*Yes, I would like a TPA. Do people usually use a local person or are there national, low-cost operators that are good?

People use both local and national lower-cost TPAs.

One well-reviewed lower-cost national TPA is Employee Fiduciary. Their establishment fee including conversion of an existing plan is $500 with a $500/year administration fee and 0.08% AUM fee. Local TPAs will typically be a little higher, but with more personal service.

I caution against using online websites offering such one-participant 401k plans. They are not TPAs. They are really just one-participant 401k plan document/adoption agreement resellers. You get exactly what you pay for with the lower cost.

While some of them might help you fill out Form 1099-R, they universally provide no plan compliance services. Also, I have noticed that their websites and advice they have given contain compliance errors.

[gohanMD]

If you have agreed to the IRR in your individual 401k adoption agreement as you cant initially max out the i401k contribution limit due to low w2 wage but later on are able to max out the i401k contribution based just on the 25% of employer contribution and the 19000 by employee, would you still be eligible to create a backdoor roth for increased contributions?