Over 415 limit message

[doombuggy]

My boss did a contribution calculation for a sole prop uni-k, and now I am left to complete (ir print) the 2010 valuaiton. The plan's doc says comp is 415c3 with no exclusions (she did the document also). The comp that is reported in the system is $24,000.00. The deferrals reported are $22,000 (with an age reported as 50 for 2010). Boss calculated a profit sharing allocation of $4800. This leaves a total of $26,800 in total contributions for the year. This is more than the person's comp for the year. I think that is why I am getting the message. thoughts? We have Datair, so I am also going to post this on their message board to see if maybe it's a glitch and something that can be ignored. This is the first year for the plan, so no 5500 filing is needed, due to the amount. Thanks for your thoughts in advance!

[Lou S.]

I'm assuming it is a sole-proprietor since the PS contrib is 20% of $24K or 25% of $19.2K.

Is the $24,000 comp before or after the PS contrib?

If it is before you do have a problem with the $22K deferral because after reducing the $24K - $4.8K (even ignoring 1/2 SE tax) you only have $19.2K in comp but $22K in deferrals which is a problem since you are not allowed to defer more than 100% of pay even with the catch-up.

If the $24K comp is actual pay (that is W-2 wages, or net self-employment income after all deductions) then I don't think you have a problem since the $5,500 catchup is excluded for your 415 testing and the actual deferral is less than 100% of pay.

Though you have a deductibility issue if you are trying to deduct $26,8K against $24K of income and this is in fact a sole prop.

[12AX7]

When I run this scenario (assuming Sole Prop) with $24,000 pre-plan comp, I get a maximum PS contribution of $2,902.22, in addition to the $22,000 (k) cotribution. I'm not sure how these results were generated, but it's $902.22 above the $24,000 starting figure. I am using the Relius Proposal system and don't think these results are correct based on how I coded the system.

A safer approach for me is to perhaps calculate the maximum PS contribution, then fill up the rest of the deduction with 401 (k), however technically the election for Sole Props are to be in effect by the end of the plan year, but you may say that 415 has reduced the dollar amount of the (k) election.

With a C Corp, you should not have a problem with the $22,000 (k) contribution, plus a $6,000 PS contribuiton, assuming plan comp of $24,000.

[ETA Consulting LLC]

I see what you are doing, and think Lou stated it correctly. You have to remain mindful that you cannot defer compensation you did not earn. With that said, you are (technically) deferring from compensation that has been reduced by the Profit Sharing contributions you made to the plan.

Let's assume (for argument sake) that $24,000 was the net Schedule C (after the reduction for 1/2 SE Tax). Then 20% of that amount would put you at the 25% PS funding limit. $4,800 is 25% of $19,200. Your compensation is $19,200 because it was reduced to this amount due to the PS contribution. $24,000 - $4,800 is $19,200. The maximum you may defer would then be $19,200.

I always have problems when trying to run on software, so I do it by hand using this methodology.

Good Luck!

[Bird]

Let's assume (for argument sake) that $24,000 was the net Schedule C (after the reduction for 1/2 SE Tax). Then 20% of that amount would put you at the 25% PS funding limit. $4,800 is 25% of $19,200. Your compensation is $19,200 because it was reduced to this amount due to the PS contribution. $24,000 - $4,800 is $19,200. The maximum you may defer would then be $19,200.

That's exactly how I see it. (Now, typically, we are not given the "after 1/2 SE tax" number, we are given the Schedule C net income and have to reduce it for 1/2 of the SE tax, so you have to be careful and know which "number" you are starting from.)