Integrated profit-sharing component of 401(k) plan - how does one make

[Guest mam]

A straight profit sharing plan that is currently integrated with SS (integration level=$15,000 and a maximum integration level percentage of 4.3%) is adding a traditional 401(k) feature effective 1/1/2k.

Will the fact that the plan is integrated have any bearing on the 401(k) addition?

If it will not have any negative impact on the plan, they want to continue integration.

How does one make a decision as to what tax base and integration percentage is best? Does anyone have any suggestions for me to help guide this client?

thanks in advance for any help.

[Dave Baker]

As you know, picking the optimal integration level is complicated -- though you'd like to lower the integration level to something less than 100% in order to "double-dip" for the higher-paid employees on a larger compensation figure (the excess of actual comp over the integration level), the tax code penalizes you by lowering the maximum additional percentage of pay that can be applied to that compensation figure. What the higher-paid employee basically cares about (especially an owner) is the dollar amount of the "extra helping" that the integration formula provides, so you have to run through all the various permutations of the integration level (down from 100% of the Social Security taxable wage base to 0%), multiplying the resulting compensation figures by the maximum disparity percentage permitted by law at that integration level.

Intrigued with the math of this process, I wrote a program in Pascal and compiled it into a shareware DOS application called the "Inte-greater."

I later converted it to an online version, at

https://benefitslink.com/cgi-bin/inte-greater/

In a coupla seconds, the Inte-greater finds the "sweet spot" you're after, and even shows the amounts to be allocated to the individual participants' accounts. (So it's a poor-man's allocation program, to boot.) You get to vary the level of the employer's contribution -- the optimal integration level often depends on whether the employer plans to make the full 15%-of-payroll deductible contribution.

I hope to have the 2000 figures added to the program soon, so that I can recompile the program and post a 2000 version.

[MWeddell]

Whether you use permitted disparity rules as part of the employer nonmatching contribution really shouldn't have any impact on the 401(k) portion of the plan. I suppose those NHCEs who understand the allocation method might perceive that it favors the well-paid and therefore might become skeptical of the whole plan, but that sounds somewhat unlikely and definitely not quantifiable.

Regarding the integration level, note that as the social security wage base rises from $72,600 to $76,200 in 2000, that the $15,000 dollar amount will become <= 20% of the wage base. Hence, the maximum excess allowance will go from 4.3% in 1999 to 5.7% in 2000 if you keep the $15,000 integration level.

Note that 411(d)(6) regulations will force you to make any plan amendments to the allocation formula effective next plan year if any employees have satisfied all of the plan's conditions for receiving this year's profit-sharing allocation (i.e. if there's no "last day of the plan year" condition).