Ideal Salary Calculations for more than one plan

[Guest lkpcs]

A Sole Proprietor has a money purchase plan & profit sharing. When calculating ideal salary, must the same compensation be used for both plans? Or, since the money purchase is primary, can a higher comp be used in the MPP, and the comp for PS calc be reduced further? Any software available that can run both plans simultaneously if same comp needs to be used? (Profit Sharing plan is integrated, by the way.)

[Ervin Barham]

Earned income is defined as compensation after contributions, so you would reduce the compensation by both plans' contributions. This can be a tricky and involved calculation. It usually involves a little bit of "what if" calculations.

I found it easier to create using a spreadsheet than trying to use the allocation systems. You might check the advertisers at this Web site. I'm pretty sure there should be one that can do this for you.

You might contact your document provider. Sometimes they will have a memorandum that will walk you through the calculation.

[LCARUSI]

I have a question related to Ervin's answer. How does the $160,000 limit figure in to your calculation? If compensation exceeds $160,000, do I reduce compensation by the contribution and then apply the $160,000 limit? Or do I apply the $160,000 limit to compensation and then subtract the contribution?

[Tom Poje]

lets pretend the money purchase plan is 5% of pay. lets pretend the profit sharing is 10% of pay, integrated at 5.7%.

The software I use (and I imagine all software) should allow you to run this as 15% of pay, integrated at 5.7%. Once you have determined the compensation, turn off the ideal salary function and run as two separate plans. It gets a little trickier if client insists profit sharing by set $ amount, but the same concept applies. Run the plans together as an initial step.

If you really want fun, make the profit sharing plan age weighted! I've managed that, but its a lot easier if its 15% in the profit sharing.

[Ervin Barham]

This is in response to LCARUSI's question.

You would start with "gross compensation" without regard to the $160,000 cap. Reduce the compensation by 1/2 the SE tax, then by the contribution. If you are still over 160k, apply the limit and treat as any other plan.

[Guest D_NITSCHE]

I too have been doing these calculations by spreadsheet like Ervin. Using the "solver" function in Lotus, also enables me to do parnership situations. My gut feel is that commercial software to do these calcs is relatively new. The reason,I think, that I cling to the spreadsheet approach rather than use software like Quantech is that with a spreadsheet I'm the programmer and have total control & flexibility. If I was the Quantech programmer involved with these types of calcs, then I think I would be more comfortable using Quantech. However, before my next renewal cycle, I'm going to try Tom Poje's approach because then you add another "trick" to the bag. In conclusion, I also agree with Ervin's answer to the compensation question posed by L Carusi.