Integrated Profit Sharing Plan

[Madison71]

I was hoping someone could walk me through the following situation.

Plan sponsor wants to add an integrated profit sharing component to his 401(k) safe harbor plan (we looked at many other options such as New Comp., but didn't work with ages, etc.) The integration level will be the TWB which would make it 5.7%.

So, if you have 4 owners, 2 in their 20's, how would the scenario work to get them to 46000

Owner 1 (age 51) 230,000 Comp. - Elective Deferrals - 15,500 Catch-up - 5,000 3% SH - 6,900 Excess (5.7%?) Base (Remaining to get to 46,000?)

Owner 2 (age 56) 230 Comp. Elective Deferrals - 15,500 Catch-up 5,000 Excess (is it 5.7% of Comp?), Base?

Owner 3 (age 24) 230K Comp. Elective Deferrals - 15,500, Safe Harbor 6,900 Excess (?), Base (??

Owner 4 (age 28) 230K Comp. Elective Deferrals - 15,500 Safe Harbor 6,900, Excess (?), Base (?)

Sample NHCE (60) 48,000 Comp. Elective Deferrals - 15,500 Safe Harbor - 1,400 Excess (?) Base (?)

There are many other NHCE's, but want to see how that is factored in as well.

Thank you!!!

[ERISAnut]

The easiest way to do this is to make a quick determination of whether the owner will receive the maximum integrated contribution (230,000-102000 x 5.7%) = 128,000 x 5.7% = 7,296.

When will this be the case; when the base allocation (excluding the SHNEC) is 5.7%. (230,000 x 5.7%) = 13,110.

This solves your integration aspect and everything else is prorata based on compensation. So, you know once the employee maximizes deferrals that there are an additional $30,500 in employer contributions needed to reach the 415 limit. How much of this 30,500 has been contributed by the SHNEC and other discretionary profit sharing. $27,306 (6900 + 13110 + 7296).

Now, what percentage of the owner compensation is the remaining $3,194. (3194/ 230000) = 1.39%

This 1.39% is added to the 5.7% base to get 7.09%.

Therefore, your discretionary PS is 7.09% of base compensation plus 5.7% of excess compensation.

Remember, base compensation is being defined as the entire $230,000.

Once this formula is determined, you will apply it to your entire participant base (as this is your uniform formula which maximizes the highest paid HCE and then gets applied to everyone else).

DO NOT READ FURTHER AS IT WOULD ONLY CONFUSE YOU:

There are some that may consider base compensation is as the integration level. In such instance, the formula is 7.09% of compensation up to and including the TWB plus 12.79% of compensation exceeding the TWB.

[Madison71]

Thanks a lot. I did run the calculation prior to your response and came up with the 5.7% plus an additional 1.39% for a total of 7.09%. Where I got confused was where I read that "in order to remain a safe harbor formula, the allocation percentage in excess of the covered comp. limit cannot exceed the lesser of 5.7%, or twice the percentage below the covered compensation level for the year." So what you are saying is that you can apply the 5.7% first to the excess and then any remaining (1.39%) would be added to the remaining? It just didn't seem right when I read that provision quoted above. How you explained it does make sense though. Thanks.

The easiest way to do this is to make a quick determination of whether the owner will receive the maximum integrated contribution (230,000-102000 x 5.7%) = 128,000 x 5.7% = 7,296.

When will this be the case; when the base allocation (excluding the SHNEC) is 5.7%. (230,000 x 5.7%) = 13,110.

This solves your integration aspect and everything else is prorata based on compensation. So, you know once the employee maximizes deferrals that there are an additional $30,500 in employer contributions needed to reach the 415 limit. How much of this 30,500 has been contributed by the SHNEC and other discretionary profit sharing. $27,306 (6900 + 13110 + 7296).

Now, what percentage of the owner compensation is the remaining $3,194. (3194/ 230000) = 1.39%

This 1.39% is added to the 5.7% base to get 7.09%.

Therefore, your discretionary PS is 7.09% of base compensation plus 5.7% of excess compensation.

Remember, base compensation is being defined as the entire $230,000.

Once this formula is determined, you will apply it to your entire participant base (as this is your uniform formula which maximizes the highest paid HCE and then gets applied to everyone else).

DO NOT READ FURTHER AS IT WOULD ONLY CONFUSE YOU:

There are some that may consider base compensation is as the integration level. In such instance, the formula is 7.09% of compensation up to and including the TWB plus 12.79% of compensation exceeding the TWB.

[ERISAnut]

the allocation percentage in excess of the covered comp. limit cannot exceed the lesser of 5.7%, or twice the percentage below the covered compensation level for the year."

I see your confusion. What this provision is stating is that in order to get the maximum 5.7% allocation on the excess compensation of ($128,000), the allocation percentage for the base must be at least 5.7%. You may not allocate 4% on the base plus 5.7% on the excess. Remember, do not get confused in the changing definition of 'base compensation'. I typically use the entire $230,000 as base compensation (making the maximum allocation to excess comp the lesser of 5.7% or the allocation percentage applied to the base).

Now let's suppose that my I consider base comp as $102,000 and excess anything above the integration level (as always). In such view, the maximum allocation to the excess compensation is the lesser of the lesser of twice the percentage allocated to the base or 5.7% plus the percentage allocated to the base.) Plugging in numbers, if the base is 10%, then the maximum excess is the lesser of 20% or 15.7%. If the base is 3%, then the maximum excess is the lesser of 8.7% or 6%.

Does this help?

[jkdoll2]

Here is a spread sheet I use for integrated plans. This may help.

I ran it on our software system and it worked out fine.

2008_calculation_for_integrated.xls

[Madison71]

Now I am really confused. It sounds like I am starting at the wrong place up front.

I calculated it as follows:

HCE 1: (Comp= 230000) (Elect. Def= 15500) (SH= 6,900) (Comp+Excess= 358,000) (5.7% of Comp + Excess = 20,406) (Remaining Cont = 3,194) (Total = 46,000)

Thats where I got confused on the excess of covered comp. cannot exceed the lesser of 5.75 or twice the % below the covered comp. level. I must be thinking about it incorrectly. After reading that, I'm thinking that after factoring in my 15,500, I have 30,000 left to get me to 46,000. I then factor in my SH and have 23,600 left. I have to start with my profit sharing contribution allocated equally amongst all participants first before I can contribute to the excess because of the lesser of 5.7% or twice the percentage below the covered comp.

I'm having trouble because I never had to worry about it before. The integration level on all of our plans is the TWB, so 5.7%. The plans are all profit sharing only, so on 230,000 you can add in your comp. + Excess get your 358,000 and calculated 5.7% of Comp. + Excess = 20,406 and then the remaining profit sharing contribution would be 25594, which would easily meet the 5.7% or twice the percentage below....

What am I missing? I seriously appreciate all of your help (and any others who want to weigh in).

the allocation percentage in excess of the covered comp. limit cannot exceed the lesser of 5.7%, or twice the percentage below the covered compensation level for the year."

I see your confusion. What this provision is stating is that in order to get the maximum 5.7% allocation on the excess compensation of ($128,000), the allocation percentage for the base must be at least 5.7%. You may not allocate 4% on the base plus 5.7% on the excess. Remember, do not get confused in the changing definition of 'base compensation'. I typically use the entire $230,000 as base compensation (making the maximum allocation to excess comp the lesser of 5.7% or the allocation percentage applied to the base).

Now let's suppose that my I consider base comp as $102,000 and excess anything above the integration level (as always). In such view, the maximum allocation to the excess compensation is the lesser of the lesser of twice the percentage allocated to the base or 5.7% plus the percentage allocated to the base.) Plugging in numbers, if the base is 10%, then the maximum excess is the lesser of 20% or 15.7%. If the base is 3%, then the maximum excess is the lesser of 8.7% or 6%.

Does this help?

[Madison71]

Thanks a lot! I took a look at it, but am slightly confused by the numbers. On one of the rows you have:

Comp 0.03 0.025 0.057 Proportional Contribution

I understand all but the .025 number. Where does this come from? Also, the contribution totals only 23,600. If you add in the 15,500 for Elective Deferrals, you are still short 6,900.00 Where does that come from (Unless that is the SH 3%, but I thought that was calculated in the .03 above)?

Thanks for the spreadsheet. I'm not trying to be difficult....

Here is a spread sheet I use for integrated plans. This may help.

I ran it on our software system and it worked out fine.

[ERISAnut]

Madison,

All of your thinking is correct. This becomes algebraic after a while. The after you add your comp to the excess for a total of $358,000, and then provide 5.7% on that amount, the additional $3,194 gets allocated to the base ($230,000) only. This additional 1.39% is added to the orgininal 5.7% base you did in the previous step.

Your process is correct, but the logic that you are applying is missing a step. The step is that there is a reason for the allocation on the $358,000 being limited to 5.7%. I could have been 4% or any amount less than 5.7%. It could not, however, exceed 5.7% because that would exceed your integration level. Therefore, at that point, all additional profit sharing contributions must be applied only to the base of $230,000; not the base plus excess ($358,000).

I know this is confusing, but when it clicks, you'll never forget it.

[Madison71]

I appreciate all of your assistance. I need to really run it again and review your comments and make sure it sticks. I'm still trying to nail down the new 403(b) regulations. Usually New Comp. works best with most of my clients so I haven't had to worry about thinking through this in awhile. I thought I had it, but I guess I never had it down. This area never gets boring. Again, thank you!

Madison,

All of your thinking is correct. This becomes algebraic after a while. The after you add your comp to the excess for a total of $358,000, and then provide 5.7% on that amount, the additional $3,194 gets allocated to the base ($230,000) only. This additional 1.39% is added to the orgininal 5.7% base you did in the previous step.

Your process is correct, but the logic that you are applying is missing a step. The step is that there is a reason for the allocation on the $358,000 being limited to 5.7%. I could have been 4% or any amount less than 5.7%. It could not, however, exceed 5.7% because that would exceed your integration level. Therefore, at that point, all additional profit sharing contributions must be applied only to the base of $230,000; not the base plus excess ($358,000).

I know this is confusing, but when it clicks, you'll never forget it.

[TPApril]

I haven't done this for a long time. At 100% TWB, I calculated 7.01% for 2012 as follows:

401k - $17,000

3% sh - $7,500

Rate on compensation up to TWB+comp>TWB - 5.7% on comp $250,000+(250,000-110,100)=$389,900 = $22,224.30

Remainder to reach $50,000 is $50,000-17,000-7,500-22,224.3= $3,275.70 for a rate of 1.31% when divided by max comp

Final integrated formula is 5.7+1.31=7.01% on total comp + 5.7% on excess comp > TWB

This results in ee making max comp of $250,000 receiving allocation of 10.2% and ee's < TWB get 7.01%

1. Does this look correct?

2. Next, trying to reduce NHCE even further, simply based on reading some posts, I'm reducing the integration level to 81% TWB. Using the same methodology I come up with 6.73% on total comp, 5.4% on excess comp. Think I'm on the right track here? End result-also 10.2% to owner, other ee's < TWB 9.73%.