We have a Sole Proprietor MONEY PURCHASE plan. For 2001, there were approximately $4,000 in forfeitures which, according to the plan document reduce the contribution.

Determining SP's net income for the plan is normally not too complicated. This plan is integrated so a bit more complilcated, but it still works to solve for salary while integrating. The total allocation comes to about $44,000 - after deducting forfeitures the net tax deductible contribution is about $40,000.

What figures do we use in determining the SP's net compensation on which to base the allocation? Do we deduct the total allocation of $44,000 or the net deductible contribution of $40,000? (I know we also deduct the self-employment tax)

$40,000 -- the amount of cash that will go in. The individual has already received a deduction for the $4,000+/-.

interesting problem!
if rank and file total comp = 100,000
gross profits = 130,000
making it simple, formula 4%

contribution to rank and file = 4,000
if I first reduce this by forfeitures, then to calculate the ideal salary I would have:
gross profits - less contribution = 130,000
FICA=7004
comp = 118265
contribution = 4731

on the other hand, lets say I don't reduce contribution by any forfeitures. then I have
gross profits - rank and file contrib = 126,000
FICA = 6951
initial salary 114,470, contribution 4579
but the contribution has to be reduced by 4000 in forfeiture.
but this will increase the compensation, so I have to increase the comp by
4000 / 1.04 = 3846 increase in salary
and 4% of 3846 = 154 (increase in contribution)
or end result of

FICA = 6951
comp = 118316
contribution = 4733 - 4000 = 733
total =126,000
plus the 4000 contrib to rank and file = 130000.

and obviously, if you were 'splitting' the forfeitures between rank and file and the sole proprietor, you would end up somewhere imbetween that.

In this example the numbers are fairly close. I suppose if the comp is going to be way above the comp limit for the year it would make life easier. But you indicated the plan is integrated as well. Fun! You got me curious just what type of gross comp and formula you really have.