Max Deductible Contribution? Need answer for C-4 test on Thursday!

[Guest chris4013]

2 employers in a CG. Company A elects not to make a contribution. Would company B's maximum deductible contribution be 25% of coverred comp of both companies?

How about:

Document requires a profit to make a contribution and company A does not have one. Max Ded. contribution for Co. B (made a profit) 25% of coverred comp of both companies?

[Tom Poje]

the general rule is that to have compensation counted toward deductibility an individual must benefit. in the case you cite, it sounds like you would not be able to consider the compensation.

by the way, in a 401k, an individual is considered benefiting if he is able to defer even if he doesn't. This particular point gets debated an awful lot.

best success on the test!

[Guest chris4013]

But here is where it gets confussing for me:

In scenario 1 where A choses not to make a contribution, the study guide answer does not include their comp in determining Co. B's max contribut.

But scenario 2, where the document prevents A from making a contribution, company B includes A's comp in their max deductible.

I don't get the difference. Does anyone have an idea?

Thank you

[R. Butler]

In scenario 1, if it a straight profit sharing an A's employees don't benefit, then as Tom Poje states you don't consider their compensation.

In scenario 2, could it be that Co. A's employee's do benefit, but that the contribution would be made by Co. B because Co. A has no profit & can't make the contribution? If that is the case than Co. B can deduct pursuant to §404(a)(3)(B)

§404(a)(3)(B) -- Profit-sharing plan of affiliated group In the case of a profit-sharing plan, or a stock bonus plan in which contributions are determined with reference to profits, of a group of corporations which is an affiliated group within the meaning of section 1504, if any member of such affiliated group is prevented from making a contribution which it would otherwise have made under the plan, by reason of having no current or accumulated earnings or profits or because such earnings or profits are less than the contributions which it would otherwise have made, then so much of the contribution which such member was so prevented from making may be made, for the benefit of the employees of such member, by the other members of the group, to the extent of current or accumulated earnings or profits, except that such contribution by each such other member shall be limited, where the group does not file a consolidated return, to that proportion of its total current and accumulated earnings or profits remaining after adjustment for its contribution deductible without regard to this subparagraph which the total prevented contribution bears to the total current and accumulated earnings or profits of all the members of the group remaining after adjustment for all contributions deductible without regard to this subparagraph. Contributions made under the preceding sentence shall be deductible under subparagraph (A) of this paragraph by the employer making such contribution, and, for the purpose of determining amounts which may be carried forward and deducted under the second sentence of subparagraph (A) of this paragraph in succeeding taxable years, shall be deemed to have been made by the employer on behalf of whose employees such contributions were made.