Match formula changed mid-year/plan has SEI

[Laura Harrington]

Plan has a self-employed individual who deferred monthly from his guaranteed payments. Match was calculated at the time the deferrals were made based on the guaranted payment amount.

From 1/1-5/31 the match formula was 100% of SD up to 1% of compensation.

From 6/1/-12/31 the match formula was 100% of SD up to 1.5% of compensation.

Now that we have the information from the K-1 to calculate actual compensation, we need to determine what his match contribution should actually be versus what the client calculated throughout the year.

Any idea how to compensate for the match formula that changed throughout the year?

I have considered pro-rating the earned income and applying the match formula that was in effect at the time each deferral was made to the pro-rated amount.

Or can we say that since compensation is deemed paid as of the end of the year, that the match can be based on 100% of SD up to 1.5% of compensation?

Another person in my office suggested calculating the average amount of compensation that was matched throughout the year and applying that match formula (i.e. 100% of SD up to 1.29% of compensation).

Any thoughts on the most accurate way to calculate this match?

Thank you!

Laura

[Blinky the 3-eyed Fish]

Your first option and the third option are the same. A question like this was posed a few months ago and it boils down to whether or not you treat earned income as ratably earned during the year or in one chunk at the end of the year. I strongly opine that the former is correct unless there is some way to truly calculate earned income at a given point in time during the year.

[Bill Presson]

Your first option and the third option are the same. A question like this was posed a few months ago and it boils down to whether or not you treat earned income as ratably earned during the year or in one chunk at the end of the year. I strongly opine that the former is correct unless there is some way to truly calculate earned income at a given point in time during the year.

I always enjoy it when you strongly opine.