By Andy Ives, CFP®, AIF®
IRA Analyst
It is perfectly acceptable for a person to participate in multiple work plans in the same year (even at the same time). For example, a 401(k) and a SEP. Or maybe a 401(k) and another 401(k). However, care must be taken to follow IRS contribution limits and other guidelines. Unfortunately, people try to circumvent these rules all the time. Sometimes it feels like everyone is working an angle, and boy, does it get tiresome.
For example, a recent conversation revealed a person who owned two businesses and was looking to open a third. These were not 50-employee or even 10-employee shops. Just small operations with a handful of total workers. His scheme: open three SEPs, one SEP for each business, and fully contribute the 2024 maximum of $69,000 to all plans for himself. NO DEAL. Based on his ownership of all companies, he (as business owner) could only contribute a TOTAL of $69,000 across all plans. Of course and as expected, the wriggling and squirming to find a loophole followed. “What if I transfer partial ownership to my wife?” Still, no deal. Stop trying to beat the system.
In another scenario, a greedy dentist wanted to stick it to his dental hygienists and staff. His idea was to open Business Entity #1 in which he, the dentist, was the only employee. He wanted to start a Solo 401(k) for this business and plow a bunch of cash into it. Meanwhile, he would open another business to house his staff. There would be no retirement plan offered under Business Entity #2. Again, NO DEAL. Since he would fully own both companies, if Business Entity #1 offered a retirement plan, that same plan must also be offered to eligible employees of the other business. (Part of me hopes that guy gets tooth decay.)
You can maximize participation in multiple plans only if the businesses are considered unrelated. For example, assume you are an employee at ABC Widget Co. with no stake in ownership. You may participate in the ABC Widget 401(k) and, if you make a good salary, can defer up to $23,000 into the plan in 2024. And if you are age 50 or older, you can leverage the $7,500 catch-up provision to drive salary deferrals up to $30,500. In addition, if ABC Widget Co. offers a match and/or a profit sharing component to the 401(k), or if the plan allows for after-tax (non-Roth) contributions, total 2024 contribution could reach $76,500! ($69,000 annual cap, plus $7,500 catch-up.)
Assume in your spare time, when not being an exemplary employee at ABC Widget Co., you also run your own consulting business called “Honest Answers.” ABC Widget Co. and Honest Answers are completely independent of each other. You could open a retirement plan for Honest Answers and, since I am sure the business would be profitable, plow additional dollars into this second plan. You choose a SEP, which can only accept employER contributions. As business owner, you could plow another $69,000 into your retirement.
The key points are: the businesses cannot be considered related by ownership under IRS rules. Also, the 2024 annual salary deferral limit is $23,000 plus $7,500 catch-up. That amount is aggregated across all plans. Since you used the full amount of salary deferrals in the ABC Widget 401(k), you cannot make any additional 2024 salary deferrals to any other plan. SEP contributions are technically made by the employer, so all is well. If Honest Answers elected to install a 401(k), the $69,000 maximum might still be attained via a profit sharing contribution or even after-tax (non-Roth) contributions. (There are many ways to fund a 401(k).)
Recognize that participation in multiple workplace retirement plans is certainly allowed. But the rules must be followed. For those with the means to do so, congratulations on your success! For those looking to game the system…go get a root canal.