This week focuses on retirement planning through a one-participant 401(k), commonly called a Solo 401(k). S corporation owners need to understand the difference between compensation and shareholder distributions when calculating plan contributions.
Learning Objectives
- Understand the employee and employer roles in a Solo 401(k).
- Understand why S corporation distributions are not compensation for retirement-plan contribution purposes.
- Recognize that annual contribution limits change.
- Learn when Form 5500-EZ may become relevant.
Primary IRS Materials
- Publication 560, Retirement Plans for Small Business
- IRS One-Participant 401(k) Plans guidance
- IRS retirement plan FAQs for S corporations
- Form 5500-EZ and instructions, when applicable
Key Concept
For an S corporation shareholder-employee, W-2 compensation is generally central to contribution calculations. Shareholder distributions are not treated as earned income for this purpose.
Practice Exercise
Using fictional W-2 compensation amounts of $10,000, $25,000, and $50,000, identify which figures would be relevant when evaluating possible employee deferrals and employer contributions. Then consult the IRS limits for the specific tax year being studied.
End-of-Week Goal
You should be able to explain the relationship between W-2 compensation, employee contributions, employer contributions, and annual retirement-plan limits.