Question #27 12/04/97

[Guest Jhagan]

Determine the amount of profit sharing contribuiton to be allocated to Emplyee A for the PY ending 09/30/97:

-Total ER Contribution - 30,000

-Plan's integration level is the taxable wage base.

- 1996 TWB = 62,700

- 1997 TWB = 65,400

-Maximum possible integration

-only plan - no employees related

Part. Comp.

A = 160,000

B = 80,000

C = 40,000

D - 20,000

Answer is $17,409. I can't get to it??

[Guest DSD]

Ugh! Permitted disparity problems can be very time consuming since you will need to calculate eveyone's contribution before getting to the amount for employee A.

First be sure you are using the wage base in effect for the BEGINNING of the plan year - 1996 in this case. Which also means you want to use the 1996 compensation limit as well - 150,000.

First break out the excess comp for each person and add it to the plan year comp. Add the plan year and excess comp for each person. Total each column. This will help determine if this allocation will be a one or two step process.

When the integration level is the wage base, the maximum disparity will be 5.7%. Multiply the total combined comp by 5.7% - 394,600 x 5.7% = 22492.20. Since this is less than the amount to be allocated (30,000), a two step process is needed.

Step one can simply be determined by multiplying each person's combined comp by 5.7%.

Step two requires allocatiing the remainder of the contribution 7,507.80 (30,000 - 22,492.20) in proportion to each person's plan year comp. See below

Plan Year Excess Combined Step One

Comp Comp Comp Allocation

A 150,000 87,300 237,300 13,526.10

B 80,000 17,300 97,300 5,546.10

C 40,000 0 40,000 2,280.00

D 20,000 0 20,000 1,140.00

Total

290,000 104,600 394,600 22,492.20

Step Two Allocation

30,000 - 22,492.20 = 7,507.80 to allocate

Allocation ratio for A

150,000/290,000 = .51724

.51724 x 7,507.80 = 3,883.34

Total for A 13,526.10 + 3,883.34 =

17,409.44

This is a typical formula for Profit Sharing plans and will usually work on the exam when given a specific dollar amount to allocate.