Jump to content

Another integration question


Guest Moe Howard2

Recommended Posts

Guest Moe Howard2

Does anyone know of a website or article that has the equation (or steps) for computing the maximum PSP contribution for a "sole proprietor owner", when the sole proprietorship has employee participants (in addition to the owner)? The plan is top heavy, integrated at 100% TWB, and the owner's income from the business is below $200,000.

I've computed contributions for for integrated corporate plans before, so I'm a little familiar with integration. I've also computed contributions for self-employed employer plans without integration (ie: if employees get 10% ....then owner can only get 1/1.10 = 9.909%).

But combining the rules of "integration" and "self-employed owner" together sounds difficult.

Thanks.

Link to comment
Share on other sites

Guest Moe Howard2

jevd: the website you referred me to only computes the contribution for corporations. My question is in regards to a sole-proprietorship (self employed).

Link to comment
Share on other sites

I don't know of any articles. You are going to have to run through the circular formula.

1. Beginning point is Sch. C income prior to any retirement plan deduction.

2. Run an allocation based on Sch. C income in #1. SKIP TO STEP #4

3. Run an allocation based on Net Earned Income from Step #7

4. Take Sch. C from #1 reduce by allocation contrib. to rank & file

5. Calulate SE tax on adj. Sch. C from Step #4

6. Reduce Adj. Net C in Step #4 by 1/2 SE tax calulated in Step #5 and by the allocation to the sole proprieter.

7. The Result is net earned income. You go to Step #3 & repeat this formula until you get a repetitive net earned income figure here.

Hope this helps.

Link to comment
Share on other sites

you get what you pay for.

no instructions provided for this spreadsheet, if you are targetting a certain $ amount for the contribution modify the % in dark green and see what appears in total contribution.

absolutely no guarantees on this. I don't recall if there were problems if the comp ended above the $ limit, but I thought I had ironed out most of the problems.

But then, remember, at times I'm an idiot doing stuff like this.

edited: now I remember, it won't cap at the $40,000 limit

Link to comment
Share on other sites

Guest Moe Howard2

R. Butler: Thanks, but what you explained is only half the puzzle. You explained how to compute the owner's eligible compensation ... but what about the integration ?

I guess my main concern is:

Let's say that the owner contributes 10% of employees' comp. Since he is self-employed, then the max he can contribute for him self is 9.0909% of his eligible comp. [so far no problem]. However, if the plan is integrated ...then the owner might wind up having contribution of more than 9.0909%. Since the whole prupose

of integration is for the owner's % contribution to be more than the employees' % .... this conflicts with the fact that owner is limited to 9.0909%.

Question: If employees' allocation is 10% of their eligible compensation, then how can employer's allocation ever be more than 9.0909% (even with integration)?

I thought the whole purpose of integration is to give owner a higher % than employees. (Why even attempt to integrate a self-employed plan if owner's % is limited from the start)?

Link to comment
Share on other sites

R. Butler: Thanks, but what you explained is only half the puzzle.  You explained how to compute the owner's eligible compensation ... but  what about the integration ?

I guess my main concern is:

Let's say that the owner contributes 10% of employees' comp. Since he is self-employed, then the max he can contribute for him self is 9.0909% of his eligible comp. [so far no problem].  However, if the plan is integrated ...then the owner might wind up having contribution of more than 9.0909%. Since the whole prupose

of integration is for the owner's % contribution to be more than the employees' % ....  this conflicts with the fact that owner is limited to 9.0909%.

Question: If employees' allocation is 10% of their eligible compensation, then how can employer's allocation ever be more than 9.0909% (even with integration)?

I thought the whole purpose of integration is to give owner a higher % than employees.  (Why even attempt to integrate a self-employed plan if owner's % is limited from the start)?

You are calculating the integration in Step #2 & #3. You have to calculate the contribution based on the plan's formula using the NEI from Step #7.

I am unaware of a simple algebraic formula that will get what you want.

The spreadsheet Tom Poje posted might give you what you want. If it doesn't & you want to post the plan's contribution formula, I don't mind e-mailing you a spreadsheet that is taylored to that plan formula. (I am currently working on my making my own self employed calc. program, but thus far for integrated plans I've only put in a basic 4 step allocation formula. I just manually change when I need something different.)

Link to comment
Share on other sites

ok, modified slightly to take into consideration the 415 $ limit, and then added a field to enter desired plan contribution amount. after you make an initial % guess to run, it will suggest an amount.

of course it wont work in every case, but looked like it was working if owners contribution is less than the $ limit.

Link to comment
Share on other sites

Moe Howard2

He has probably already received a lot of requests, but i e-mailed Dave to see if he could include a calculation for the self-employed plan.

JEVD

Making the complex understandable.

Link to comment
Share on other sites

Guest Moe Howard2

Tom, great spread sheet.

I follow how you computed the partner's eligible comp of $277,061.85, but I'm having a problem with your contribution of $29,289.

It is my understanding (since he is self employed) that his max contribution can be no higher than the lower of (even with integration):

$200,000 x 11.424% = $22,848

OR

$277,061.85 x 10.2527% = $28,406

[note: X / 1.X = 11.424 / 1.11424 = 10.2527]

I'm sure that you are correct. I'm just not thinking right. My belief that integration can't be used to increase the X / 1.X limitation for self-employed participants may be unfounded. But I have a hard time believing that the limitation on self-employed contribution is completely void just because the plan is integrated.

Can anyone help me see the light?

Link to comment
Share on other sites

Moe, I may not be getting the full picture since you didn't post any numbers (and if you want to do that I would be happy to run them through my own spreadsheet as an exercise), but...

It seems to me that if you're looking at self employment income of $277,000, and he only has a couple of employees, that his net taxable income after all deductions will be greater than $200,000 and you should just use $200,000 as if it were W-2 income.

I don't see the relevance of any percentage calculation that uses $277,000.

Ed Snyder

Link to comment
Share on other sites

I also see Bird's point.

Is this a straight profit sharing? Its indicated in the initial post that the owner wants to max out. If the owner's Net C (after contribs. for rank & file) is over $200,000, unless he has 401(k) deferrals or a large amount of reallocated forfeitures, its difficult for me to imagine that he couldn't get $40,000. I do know that a plan could contain an allocation formula that has the effect of limiting contribs. to the owner, but it justs seems unlikely in the case of a sole propreiter.

Link to comment
Share on other sites

Guest Moe Howard2

Blinky, usually you are right on the mark ... but this time you are full of crap.

Anyone who does not realize the relevance of using self-employment income (less 1/2 SE tax) when it is in excess of the $200,000 415 limit simply is not familiar with computing maximum contribution for a self employed participant.

Link to comment
Share on other sites

Where's Mike Preston? I need a wow! So Bird, Butler and I are full of crap? You sure you want to get so aggressive when you really don't understand this simplistic calculation and you really don't understand Bird's point. I would explain it to you, but I really don't want to. I will leave you to your ignorance.

Oh, by the way, when you do discover the error of your comments, ask yourself the question if you like apples.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

Link to comment
Share on other sites

The last few pages of Publication 560 (p21 - 23 of 2003 Publication) is a deduction worksheet for Self-Employed.

While it doesn't 'provide' a chart for an 'integrated' rate (the table is a flat %) I believe you simply would make an adjustment on an individual basis to take integration into consideration.

The instructions simply say 'plan contribution rate' and in the excel sheet the rate

was 11.424% plus 5.7%>twb.

I would hold that is the rate (That rate would vary depending on how much comp one has once above the TWB)

in other words, on the excel sheet the contribution was 29,289 and comp limited to 200000 so the plan contribution rate (for this individual) was simply 29289 / 200000 = 14.6445%

Link to comment
Share on other sites

I do now see where Moe his getting those numbers, they aren't his numbers they are off your spreadsheet.

One question about the spreadsheet. If the excess % is 5.7%, why is employee #2 getting an integrated contrib. of 1.71 & not $171.00? I was just looking at it & trying to see how it worked.

Link to comment
Share on other sites

It was crap by association. If all I am doing is seeing Bird's point and so is R. Butler, then you can't call me full of crap without calling them full of crap too. I didn't add any new comment, you just didn't like how I said it.

When you get some experience and see the point, I will accept your apology. I think I better go Dom on the rest of this post or I may get in trouble. (That was for you Andy.)

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

Link to comment
Share on other sites

as noted, spreadsheet could be in error. I threw the calculation 'for others' together in a hurry. it is multiplying by a 'percent' and then dividing by 100. obviously, that should be corrected! interestingly enough, I must have discovered the problem, made a the correction to cell k13, but not copied for k14 - k22.

try making the correction, then look at the suggested base % to run and try that. looks like it works.

my apolgies for not spotting the error.

Link to comment
Share on other sites

Thanks to Blinky and Butler for backing me up.

Moe, you started out saying that self-employed income was under $200,000, then there was a reference to $277,000, so I don't know what the actual scenario is. As I stated earlier, I would be more than happy to take 30 seconds and run actual numbers through my spreadsheet and post them here for peer review. If I'm doing something wrong I'd like to be educated.

I wouild be especially interested in learning about using comp in excess of the, um, 401(a)(17) limit directly in an allocation calculation.

Ed Snyder

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...