Calculation for Partner @ 7/1, 5%TWB+20%>TWB

[Guest crosseyetester]

A professional firm with a calendar plan year has a profit sharing contribution formula of 5% up to the wage base ($94,200) and then 20% of compensation in excess. A participant became partner at 7/1/06 so his compensation prior to becoming partner and after is treated differently. After becoming partner, 401(k) and 1/2 tax on self employment are taken out before calculating contribution, and then the contribution is divided by 1.2.

So for instance, a non-partner's first tier would be $94,200*.05 = $4,710. A partner would be $94,200 * .05 / 1.2 = $3,925. (This is per the client's cfo.)

Say a sample participant earned:

$60,000 in the first half of the year, as non-Partner, and

$55,000 in the second half, as Partner, after adjustments.

The client has informed me that each period is treated differently and wants to apply 5% to each part. I feel like there is an excess over $94,200 that needs to be taken into account.

Client comes up with 60,000*.05 + 55,000*.05/1.2 = $5,291.67.

I come up with 60,000*.05 = $3,000 +

(94,200-60,000=34,200)*.05/1.2 = $1,425 +

(55,000 - 34,200 = 20,800)*.2/1.2 = $3,466.67 =

$7,891.67.

Any thoughts please?

[Mike Preston]

Seems to me this is a straightforward calculation. It just depends on what the document says. If the document is a normal document, your calculation looks right to me. If there is special language in the document that somehow makes the client's interpretation proper, then obviously your calculation is wrong!