Deductibility limit under Section 404

[Guest Joe Vasko]

If a plan sponsor maintains a profit sharing plan with 401(k)provisions, how is the 15% deductibility limit under Section 404 determined?

Do you use the compensation of a participant ,who deferred a portion of his/her salary during the plan year and then terminated prior to the end of the plan year, when determining the maximum profit sharing contribution that can be made(assume 1,000 hrs./last day requirement)?

Also, for 404 purposes, do you use full year compensation or date of entry (if defined in the plan document)?

Thanks

[Jon Chambers]

From memory, you use compensation for all participants who are eligible to defer (note that this may cause problems if you have different populations for deferrals and PS contributions). And I believe the 404 regs permit you to use total comp, not just eligible comp. Watch out, I didn't look this up.

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Jon C. Chambers

Principal

Schultz Collins Lawson Chambers, Inc.

(415) 291-3004

[rcline46]

If eligible, include comp. 401(k) is part of PSP plan, even if a separate plan.

404 always uses annual pay UNLESS there is a change in the plan year.

[AndyT]

Joe Vasko,

I'm not the moderator, but the answer to your question is yes - you may include comp for those people who were eligible to defer under the 401(k) provision but not eligible for the PS contribution. See the following:

Code Section 404(a)(3)(A)

Treas. Reg. 1.410(B)-3

Q&A #82 from IRS Answers at the 1996 ASPA Conf.

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Andy Treece

[Guest Joe Vasko]

I'm still unclear whether I should include compensation for terminated participants who were eligible to defer, but not eligible to receive a profit sharing contribution for 404 purposes.

Moderator: Could you please respond with the correct answer to this question.

Thank you.

[Guest Joe Vasko]

Andy Treece,

Thank you for your help!

Joe Vasko