15% deductible limit in a 401(k) PS Plan--eligible to defer, not eligi

[Guest Kelly R]

Situation: 12/31 plan w/ immediate entry date for 401(k); 2 YOS requirement & 1/1 7/1 entry dates for discretionary (profit sharing) contribution.

Question: can/should 401(k) deferred & compensation earned by participants eligible to defer, but not yet eligible for profit sharing due to 2 YOS requirement, be included in the deductibility calculation?

I understand including these amounts in the calculation when the only reason they're not "participating" in the profit sharing is due to a 1000 hour or last day requirement, but am unsure of how to handle in this situation.

Can you cite any Codes / Regs?

[Spencer]

When calculating the deductible contribution, you only use "eligible" compensation per IRC 404(a)(3)(A). So you don't include compensation for anyone who is not eligible to share in the contribution; it's doesn't matter whether it's due to a 1,000 hours requirement, a last day requirement or a 2 yos requirement.

[LCARUSI]

I think Kelly's question is (and I'm not sure of the answer):

The COmpany must calculate a single 404 limit based on eligible compensation for 401(k) contributions, and all other company contributions. If an employee is eligible to make 401(k) contributions , but chooses not to , and is not eligible for profit sharing, should his or her compensation be included in the total comp for 404 purposes? I believe the answer is yes, but I'm not sure.

[Guest Kelly R]

The deduction limit is based on the compensation of employees benefitting under the plan. In a normal 401(k) PS Plan (same service/age requirements to "enter" for both PS & 401(k) piece), participants eligible to defer (everyone employed during the current year who has met the eligibility requirements) but not eligible to receive a PS allocation, are included in the deductibility calculation.

What happens when the 401(k) entry date is immediate and the service requirement for PS is 2 years of service?

Since it's all just one Profit Sharing Plan, you could argue including the compensation for those eligible to defer. After all, isn't the 401(k) deferred by those participants supposed to be included in the deductibility calculation? For some reason, it just doesn't seem fair! HELP!

[This message has been edited by Kelly R (edited 07-29-99).]

[Guest BSOSKY]

Kelly, We had this come up a few times at our firm. You would include the person's comp in your deduction calculation eventhough he is not eligible for the PS portion. Since the person is eligible to defer under the 401-k portion, that person is considered "benefiting" under the plan. (note: Deferrals are considered employer contributions for deduction purposes). This was also posted at ASPA (American Society of Pension Actuaries) where the same question was posed to the IRS and the IRS said as long as the person was eligible for the k-portion, you would count their comp even if they were not yet eligible for the PS contrib. Sites in the law are under 404(a)(3)(A) and 1.410(B)-3. Also taken a step further, a separate 401-k plan and a separate PSP, being considered a "single trust" under 404(a)(3) could determine total comp in the same manner. I hope this helps!