Can sharholder receive allocation in separate Profit Sharing Plan

[Guest Bob Lees]

Have a client with a separate ESOP & Profit Sharing Plan. The shareholders have elected 1042 treatment and receive no allocations in the ESOP. Can they receive an allocation in the profit sharing plan? The plan allocates using a salary proportional formula. The shareholders receive a greater contribution percentage than some of the participants because of the combined plan limits of 25% or $35,000. There are other participants who receive the same contribution percentage as the shareholders. The profit sharing plan wasn't set up to make up for lost contributions. The profit sharing plan has been in effect for years, the ESOP is new.

I thought that the shareholders could receive an allocation as long as it was not of the shares sold under 1042.

Thanks.

[BeckyMiller]

I would say that the shareholders can receive an allocation in the profit sharing plan, as long as that contribution is made in accordance with that plan's terms and otherwise satisfies the non-discrimination rules.

If you look at the non-discrimination rules regarding the treatment of persons excluded from receiving benefits because of a 415 limit or 409(n), you can readily get confused. When applied to Section 409(n), I tend to use the language in the 401(a)(4) regulations very cautiously. (For example, if everyone hits their 415 in the ESOP, so your 2 owners are the only folks who get a profit sharing contribution, I would get nervous. Others might not.)

Besides, this won't work for 2002 years or later, where we no long have the 25% of pay individual allocation limit.