Benefits Exceeding Compensation

[Guest jetfaninmn]

I have never given this much thought, but this was presented to me today from a broker:

A company has two employees, a husband and wife. Both are over 50. The owner makes $188,000 and the spouse makes $44,000. Both defer $15,000 for 2006 and make use of the $5,000 catch-up. They make an employer contribution of 25% of the payroll in the amount of $58,000. They split the contribution between them, $29,000 each. In this example, the spouse, who makes $44,000 will receive total benefits of $49,000. At first look, this seemed incorrect, but after a quick review, it passes 404 and 415 limits and looks fine. Anyone disagree?

Thanks.

[Blinky the 3-eyed Fish]

The broker has it right. (I never thought I would say those words.)

[GBurns]

Shouldn't the employer contribution be a per particpant calculation rather than on a total payroll basis?

What allows equal sharing?

[Archimage]

There is nothing inherently wrong with it but you need to make sure the plan document's allocation formula is defined in this manner.

[GBurns]

Is this "splitting" of the employer contribution okay only because it is the spouse? Would it be okay if it was some other non-relative employee?

If so, just so that I understand, you are all saying that an employer could also split this so that the employee gets $5,000 and the owner gets $53,000 as long as the Plan Document has such an allocation formula, of course subject to whatever the limit has to be for any non-discrimination etc?

[Guest Dash02]

IRS now permits plans to establish allocation groups to which the employer can contribute any discretionary amount it so chooses each year. Furthermore, each participant can constitute a separate allocation group. I utilize this allocation scheme in most of my cross-tested plans. Obviously, it provides maximum flexibility.

[Kevin C]

In this case, it doesn't really matter what the PS allocation formula is as long as the Plan limits the employer allocation to an individual participant to comply with section 415. Even a salary proportional allocation will work. When the husband reaches a PS contribution of $29,000, the remainder of the PS contribution gets allocated to the remaining participant, the wife, until she hits 415.

If the Plan's 415 language says deferrals are refunded if the employer allocation would cause a 415 violation, you need two allocation classes or a carefully designed PS allocation method.