Employer Contribution Limit Calculation

[Guest Ann]

401(k) Plan has employee deferrals and match contributed. In calculating the maximum employer contribution for the 15% limit, I am using taxable wages of eligible participants excluding 401(k) deferrals and cafeteria plan deferrals; also excluding any participant's wages if not employed on the last day of the year; also excluding any participants wages above the $160,000 limit. I multiply this figure by 15%, then subtract the elective deferrals and employer match which then gives me the net profit sharing contribution allowable for the employer's fiscal year.

Is this correct?

[LCARUSI]

I'm not sure if you have to exclude compensation for participants who are not employed on the last day of the plan year. Presumably, they were participants in the Plan during the year (401(k) eligible)even if they don't get a share of the year-end profit sharing allocation (I'm assuming they don't get a share and that is why you are excluding their compensation.)

Other than that, I agree with your methodology.

[Tom Poje]

1. Make sure you subtract deferrals from compensation before applying 160,000 limit. Do not cap comp at 160,000 then subtract deferrals.

2. Eligibility for profit sharing has nothing at all to do with 15% calculation. If an employee could have deferred you count his compensation. Doesn't matter if he terminated.

[Guest D_NITSCHE]

In other words, Tom , an employer can deduct

15% of the compensation of those who are

benefiting under the plan for any part of the year. Is that correct ?

[Guest LJS]

We have had an IRS reviewer take issue with us recently on how to calculate the 15% limit. We had submitted a plan to VCR that had exceeded the 15% limit. The IRS reviewer questioned us about how we determined the 15% limit. We had calculated it in the same manner that Tom mentioned (subtracting out deferrals first, and then applying the compensation cap). However, this IRS reviewer was arguing that you apply the compensation cap first, and then subtract out the deferrals. Everyone in the pension field that we have talked to agrees with us, but cannot provide us with a cite as to why. Any comments on this would be greatly appreciated. Also, any cites would be welcomed.

[Guest ESOPwizard]

<< Everyone in the pension field that we have talked to agrees with us,

but cannot provide us with a cite as to why. Any comments on this would

be greatly appreciated. Also, any cites would be welcomed.>>

If my memory is correct, this type of issue first arose when applying the top-heavy rules to plans of self-employed individuals. If a sole proprietor who earned over $250,000 was going to have $30,000 allocated to his DC accounts, the question was whether his compensation for allocation purposes was $170,000 ($200,000-$30,000) or $200,000 (the 416 limit). If you search, you should be able to find a ruling that the answer is $200,000. That principle has carried forward to 401(a)(17).

PS: My memory is not infallible.

[Tom Poje]

I have no cite per se, but would refer to The Erisa Outline Book by Sal Tripodi,(produce via ASPA) in particular 7.194 (4th edition)- comments and examples are given on Effect of compensation limit. If the IRS won't buy Sal or ASPA, then the pension industry is hurting.

[Guest victoria davis]

The ability to count the compensation of all eligible employees under a 401(k) plan is really a gray area. The regulations can be read to say that only the compensation of active 401(k) participants can be counted if the only employer contribution is a match. The regulations provide that you can only count the compensation of participants who actually participate during the year or at least have an account in the plan. The regulatory language is as follows: calculation includes "employees who, in such taxable year of the employer, are beneficiaries of the trust funds

accumulated under the plan."

As to excluding compensation of those employees who terminate before year end, there is a Revenue Ruling which specifially requires this.