The IRS set the 2024 Section 415(b) benefit cap at $275,000. That number gets the headlines. But the actual funding decision for a solo consultant over 50 happens on Form 1040 Schedule 1, where your retirement contribution sits next to the self-employed health insurance deduction and changes the Section 199A deduction.
A defined benefit plan lets you fund for a fixed annual retirement benefit. Most solo consultants use a cash balance plan, a type of defined benefit plan that states the benefit as a hypothetical account balance. The plan actuary calculates the contribution needed to hit that balance at retirement given your age and assumed earnings. The older you are, the higher the contribution. That's why the $69,000 defined contribution limit for 2024 rarely matters for a 55-year-old with strong cash flow.
Three deductions draw from the same net profit
Your Schedule C net profit feeds three deductions. Most plan illustrations model them separately.
- Self-employed health insurance deduction under Section 162(l), reported on Schedule 1
- Defined benefit plan contribution after the earned income calculation that accounts for one-half self-employment tax
- Section 199A deduction reported on Form 8995 or 8995-A
For a sole proprietor, the health insurance deduction and the retirement contribution both reduce qualified business income. An actuary can calculate the maximum contribution without touching the health insurance line. The tax result can't be read without it.
The federal tax saving on each dollar is less than the top rate
For a consultant below the Section 199A threshold, each $100 of plan contribution reduces qualified business income by $100. The Section 199A deduction then drops by $20, which leaves taxable income $80 lower, not $100 lower. At a 37 percent federal marginal rate, the federal income tax saving is $29.60 on that $100 contribution. State tax adds on top.
If you're above the Section 199A threshold for a specified service trade or business, the deduction is zero. The contribution then saves 37 cents per dollar because no 199A deduction is lost. The optimum depends on where taxable income lands after the health insurance deduction.
The health insurance deduction moves the funding target
Every $1 of self-employed health insurance premium reduces qualified business income by $1. If the full 20 percent Section 199A deduction applies, that premium cuts the 199A deduction by 20 cents and lowers taxable income by 80 cents. The health insurance deduction shares the same base as the retirement plan.
An actuary who ignores the premium can set the cash balance contribution too high or too low. The contribution is too high if the premium already pushed taxable income below the 199A threshold and each added retirement dollar then costs a lost 199A deduction. The contribution is too low if the premium didn't reach the threshold and a larger retirement contribution closes the gap. The useful funding target is the taxable income point where the next $100 of plan contribution stops losing 20 cents of Section 199A deduction.
Spousal rules and compensation definitions
A solo consultant who employs a spouse must coordinate two plan documents. The defined benefit plan may require the spouse's consent before certain benefit elections if the plan is subject to the qualified joint and survivor annuity rules. The same spouse may sit on the group health plan. The retirement plan document and the health plan document each state their own definition of compensation. Read both.
That mismatch shows up in plan administration, not in the initial illustration. Before the first contribution, ask the plan drafter and the health plan administrator to compare the definitions of compensation and eligible employee. A benefits system that uses one compensation number for retirement and another for health coverage will eventually require a correction.
What to check before you fund
- Run the plan contribution at three points: the maximum, the taxable income threshold, and zero.
- Ask the actuary to include the self-employed health insurance deduction in each run.
- Confirm the current year Section 415(b) cap. The 2024 cap was $275,000 and adjusts annually.
- If a spouse works in the business, compare the retirement plan's definition of compensation with the health plan's definition.
For many solo consultants, the number that holds taxable income on the correct side of the Section 199A line is lower than the actuary's maximum.
Disclosure: This article is general information and not legal, tax, or medical advice. A solo consultant should have a tax advisor and an actuary review the plan design before funding.