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I've heard that owners of an S-Corp are penalized if participating in a 401(k) because they are limited by the amount they may contribute to their 401(k).

To the best of my knowledge, owners of the corp. are not penalized for contributing to a 401(k) any more or less than any other highly-compensated employee.

On the other hand, a profit sharing plan has no limits that I'm aware of regarding employer contributions.

The §415 limit of the lesser of 20% of total comp. or $30k does apply.

Since the owners are typically the highest paid employees, they'll get the lion's share of the contribution.


My questions are: (1.)am I on target in the above statements?


(2.) Does it make sense for us to offer both the long-standing profit sharing plan AND add a 401(k) so the rank and file can sock away some retirement money even if the company doesn't make a contribution to the profit-sharing plan?

Well, you don't get to adopt a profit sharing plan for just certain employees, it must be for all employees; further, the profit sharing formula when implimented must be the same for all employees (however, you can use a social security integrated formula that does favor highly compensated employees). Lastly, adpoting a PS plan and actually making a PS plan contribution has (believe it or not) absolutely nothing to do with whether or not the corp. actually makes a profit.

However, I would adovcate creating a 401(k) plan with a modest match (to keep participation as high as possible) & a staged PS plan so that every one gets some benefit & the highly compensated hit the magic $30k each year. Any competent accountant or benefits lawyer can give you the details & formulas.

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