401(k) Profit Sharing Plan contribution

[Guest Theresa]

We have a client who wants to max out their profit sharing contribution. How would I go about doing this? There are only 3 participants eligible in the plan and two of those defer, however they don't come near the deferral limit of $10,000. The only other participant is a doctor who earns over $160,000. What is the maximum they can put in the plan for the profit sharing contribution?

[Guest]

1. it does not matter whether someone defers or not, as long as they are eligible to defer, you get to count their compensation toward the limit.

2. add up all the 'net' compensation.

by 'net' compensation, you take compensation less any deferrals (including possible 125 deferrals as well) and then cap at 160,000 if neccessary. You do not cap at 160,000 and then reduce by defrrals.

3. Take 15% of this total. this is the maximum contribution.

4. you then reduce this figure by any deferrals and match to determine the maximum discretionary profit sharing.

[Dave Baker]

Nicely summarized, Tom!

I'd add this footnote: if the plan has an integrated formula, you might not be able to contribute the whole 15%-of-total-compensation-as-adjusted number that Tom describes ... if there are lots of rank-and-filers, they would be getting something like 12% of pay and the highly compensated employee(s) would be getting something like 17% of pay.

[Guest Roman]

I thought they took away the deferral exclusion from the definition of "net compensation" effective for plan years after 1997. Am I missing something here?

[Guest Richard Scheer]

I agree, I thought that the Plan now has the option to exclude or include the 401(k) and 125 deferrals and that the Plan Document must specify the rules in its definitioon of compensation.

[Disco Stu]

The definition of 415 pay has changed. It is no longer reduced by pre-tax items. Compensation used for 404 purposes has not changed. 'Net' comp, at Tom puts it, is the correct comp to use in calculating a max deductible contribution.

[This message has been edited by Disco Stu (edited 03-08-2000).]

[Guest Roman]

Is it not true that Sec 404 refers to Sec 415 for compensation?

[Disco Stu]

I don't believe that it does. If you have a particular section in mind, please post it in.

For more guidance in this area, you can check § 1.404(a)-9(B). The Pension Answer Book from Panel Publishers also has some good info on this subject.

[Guest]

Agreed. there is nothing I know that relates 404 to 415. two different items. that was one of the gripes - why didn't the govt change both of them to be the same.

[JWK]

I understand there's a "correction" for this in the Small Business Tax Fairness Act of 2000, which includes most of the pension provisions that were in the tax bill vetoed by the president last fall.

[Guest TYounkin]

Just asking for clarification. Isn't the limit of $160,000 (from second posting above) last years limit? I thought the limit for year 2000 was $170,000. thanks.

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401(k) Advocate