Updated for 2020. Can I contribute to more than one retirement plan? This is a common question for individuals that are not employed full-time in their business – independent consulting is a common example. If you are the owner and only employee (aside from a spouse) of a company, but have another job where you’re covered by a 401(k), you can typically contribute to both plans – within certain limitations.
As previously mentioned, recall that contributions can be made to 401(k) plans in two ways: the individual deferral and the employer, or profit-sharing, component. These respective limits also apply to those covered by more than one retirement plan.
Limits on individual contributions when covered by more than one retirement plan
The annual elective deferral limits apply to the individual, not the plan. So if you’re covered by a 401(k), 403(b), SIMPLE 401(k), or SIMPLE IRA, your individual contributions will be aggregated and cannot exceed the lesser of deferral limits set by the plan, 100% of your eligible compensation under the plan, or the maximum contribution limit as set annually by the IRS.
For example, Robert is 40 years old and covered by both a SIMPLE 401(k) plan and a Solo 401(k) plan, earning W-2 income of $150,000 and $50,000 respectively. In 2020, the maximum Robert can contribute to both plans at the individual level is $19,500. This amount can be divided between both plans, but Robert cannot exceed the lesser annual contribution limit of $13,500 in his SIMPLE plan in 2020.
Limits on profit sharing contributions when covered by more than one retirement plan
The annual profit sharing contribution limits by an employer apply to each unrelated company’s specific plan. For 2020, the annual additions limit for employee and employer contributions to defined contribution plans (like a 401(k), 403(b), or SEP IRA) is $57,000 for those under the age of 50. Investors age 50 and over can also make a catch-up contribution above and beyond the $57,000 maximum funding, though this is not available with SEP IRAs. SEP IRAs are generally funded only by employer contributions.
With the exception of the SEP, defined contribution retirement plans may consist of funding at the individual and employer level. The individual contribution limit cannot be exceeded regardless of how many retirement plans you're eligible to participate in. However, each of your employers may still be able to contribute up to $57,000 per plan. Keep in mind the actual amount you (or your employer) can contribute will still be subject to your earnings, plan limitations, and other factors.
Controlled group classifications may treat multiple businesses with related ownership as one employer for retirement plan purposes. These rules were developed to prohibit business owners from forming a new company to exclude employees from the retirement plan.
The finer points of these determinations can get quite complex, but at a high level, a controlled group can be defined as:
- Parent-subsidiary group
- When one or companies are connected through stock ownership with a common parent corporation and 80% or more of the stock of a corporation is owned by one or more corporations in the group (excluding the parent); and
- The parent corporation owns at least 80% of one other corporation in the group
- Brother-sister group
- At least two corporations where five or fewer common owners (individual, trust, or estate) have a direct or indirect ownership through attribution rules (typically 80%); and
- At least five or fewer owners are considered to have “effective control.” Effective control is more complicated, but typically means that combined, owners control 50% or more of at least two corporations, assuming stock ownership is identical with respect to each corporation. In more simplistic terms, identical ownership means that if an owner has a stake in more than one company, the smallest percentage owned in any one company is used
Parent-subsidiary controlled group example:
Delta Corporation owns the following interests:
- 85% of Bravo Corporation
- 60% of Lima Corporation
- 80% of Tango Corporation
Remaining ownership is owned by an unrelated party. Delta is considered to be in a parent-subsidiary controlled group with Bravo and Tango Corporations.
Now assume Tango Corporation owns 90% of Alpha Corporation. The result is that Delta is considered to be the parent of a parent-subsidiary controlled group with Bravo, Tango, and Alpha Corporations.
Brother-sister controlled group example:
Ownership breakdown for Alpha, Bravo, and Delta Corporations:
|Owner||Alpha Corp||Bravo Corp||Delta Corp|
Alpha, Bravo, and Delta Corporations are considered to be a brother-sister controlled group because both tests are met. The same five or fewer individuals own at least 80% of each corporation and the same five or fewer individuals own more than 50% of each corporation, taking into account identical ownership.
Alpha and Bravo Test
|Owner||Alpha Corp||Bravo Corp||Identical Ownership|
Alpha and Delta Test
|Owner||Alpha Corp||Delta Corp||Identical Ownership|
Bravo and Delta Test
|Owner||Bravo Corp||Delta Corp||Identical Ownership|