What is the highest safe harbor 401(k) contribution a 36-year-old shareholder employee can make in 2025 if the corporation's federal taxable income is $1,200,000?
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To determine the highest safe harbor 401(k) contribution a 36-year-old shareholder employee can make in 2025, we need to consider the following:
- Elective Deferral Limit: The maximum amount an employee can defer from their salary into a 401(k) plan in 2025 is $23,500.
- Catch-Up Contributions: Catch-up contributions are only available to employees age 50 or older (or, for a higher limit, ages 60-63). Since the employee is 36, they are not eligible for any catch-up contributions.
- Employer Contributions (Safe Harbor and Profit Sharing):
- In a safe harbor 401(k) plan, the employer must make either a matching contribution (typically 100% of the first 3% of compensation deferred, plus 50% of the next 2% deferred) or a nonelective contribution of at least 3% of compensation for all eligible employees.
- The plan may also allow for additional discretionary profit-sharing contributions, subject to the overall annual addition limit.
- Overall Annual Addition Limit: The total contributions (employee elective deferrals, employer matching, employer nonelective, and profit sharing) to a participant’s account cannot exceed the lesser of $70,000 or 100% of the participant’s compensation in 2025.
- Compensation Limit: For contribution purposes, only the first $350,000 of compensation can be considered in 2025.
Calculation
- Elective Deferral: $23,500 (maximum for 2025)
- Employer Contributions: The employer can contribute up to the difference between the annual addition limit and the elective deferral, provided the total does not exceed $70,000 or 100% of compensation.
Assuming the shareholder employee’s compensation is at least $70,000 (and up to $350,000), the maximum total contribution is:
- $70,000 (the annual addition limit for 2025)
This $70,000 can be made up of:- $23,500 employee elective deferral- $46,500 employer contributions (safe harbor + profit sharing, as permitted by the plan)
Key Points
- The safe harbor minimum (3% nonelective or the matching formula) must be satisfied, but the employer can make additional profit-sharing contributions up to the annual addition limit.
- The corporation’s taxable income does not limit the amount that can be contributed to the employee’s account, as long as the plan’s deduction limits are not exceeded. For a corporation, the deduction for all plan contributions cannot exceed 25% of the total compensation paid to all eligible participants, but this is a plan-level limit, not a per-employee limit.
Conclusion
The highest safe harbor 401(k) contribution a 36-year-old shareholder employee can make in 2025 is $70,000, provided their compensation is at least $70,000. This includes $23,500 in elective deferrals and up to $46,500 in employer contributions (safe harbor and profit sharing), subject to the plan’s terms and the overall annual addition limit.
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