How much can a greater than 2% S Corporation shareholder employee aged 50 contribute in total to a 401(k) plan in 2025, including both employer and employee contributions?
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For a greater than 2% S Corporation shareholder-employee aged 50 in 2025, the total amount that can be contributed to a 401(k) plan—including both employee elective deferrals and employer contributions—is governed by several key limits set by the Internal Revenue Code and IRS guidance. Here’s a detailed breakdown:
1. Employee Elective Deferral Limit (401(k) Salary Deferral)
- For 2025, the maximum elective deferral an employee can make to a 401(k) plan is $23,500.
- Because the individual is age 50 or older, they are eligible for a catch-up contribution of $7,500.
- Therefore, the total possible employee elective deferral (including catch-up) is $31,000 ($23,500 + $7,500).
2. Employer Contribution Limit (Profit Sharing/Nonelective)
- The total annual additions to a participant’s account (which includes employee elective deferrals, employer contributions, and any forfeitures) cannot exceed the lesser of:
- $70,000 for 2025, or
- 100% of the participant’s compensation.
- Catch-up contributions are not counted toward the $70,000 annual additions limit. This means the $7,500 catch-up is in addition to the $70,000 cap.
3. Compensation Limit
- The maximum amount of compensation that can be considered for plan purposes in 2025 is $350,000.
4. S Corporation Shareholder-Employee Considerations
- For S corporation shareholder-employees, only wages paid to the shareholder for services rendered to the S corporation (i.e., W-2 wages) are considered compensation for retirement plan purposes. Distributions or K-1 income are not considered compensation for 401(k) contribution purposes.
5. Calculation of Maximum Total Contribution
- The maximum total contribution for a 50+ year-old S corporation shareholder-employee in 2025 is:
- $70,000 (combined employee deferral and employer contributions, not including catch-up), plus
- $7,500 (catch-up contribution),
- for a total of $77,500, provided the individual has at least $77,500 in eligible W-2 compensation and the employer is willing to make sufficient contributions.
Example:
If the shareholder-employee has at least $77,500 in W-2 wages:- Employee elective deferral: $23,500- Employee catch-up: $7,500- Employer contribution: $46,500 (to reach the $70,000 annual additions limit)- Total possible contribution: $77,500
If the W-2 compensation is less than $77,500, the total contribution (including catch-up) cannot exceed the sum of W-2 compensation plus the catch-up, subject to the 100% compensation limit for annual additions.
6. Special Note on Greater than 2% S Corporation Shareholders
- Greater than 2% S corporation shareholders are not eligible to receive pre-tax employer contributions for health insurance or certain other fringe benefits, but this restriction does not apply to employer contributions to a qualified retirement plan such as a 401(k).
7. Tax Deductibility
- The employer’s deduction for contributions to the plan is generally limited to 25% of the total eligible compensation of all participants, but this does not affect the annual additions limit for the individual participant.
8. Summary Table for 2025 (assuming sufficient W-2 compensation)
Employee elective deferral: $23,500
Employee catch-up (age 50+): $7,500
Employer contribution: up to $46,500
Total maximum contribution: $77,500
Key caveats:
- The total of all contributions (other than catch-up) cannot exceed the lesser of $70,000 or 100% of W-2 compensation.
- The catch-up contribution is allowed in addition to the $70,000 limit.
- Only W-2 wages from the S corporation count as compensation for these purposes.
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