Integration Level for Mid-Year New Entrant

[Jed Macy]

FACTS: A new employee is hired in May 2010 and becomes eligible to enter the Profit Sharing Plan on July 1, 2011. The plan provides that only his compensation from entry is included in the allocation of profit sharing. The allocation of profit sharing is integrated with social security by allocating 5% of pay above the SSTWB (social security taxable wage base) of $106,800; and then 5% of all pay.

During 2011 his total compensation is $400,000 and from July 1 to Dec 31, 2011 it is $200,000.

Q1: Is his 2011 plan compensation limited to $122,500 (half the statutory limit)?

Q2: If yes, how much is the applicable integration level: $106,800 or half that at $53,400?

Unfortunately the plan document doesn't address this. But I assume it isn't a choice and that there is a regulation that does. If you know which one, please let me know.

Thanks.

[Tom Poje]

the only proration mentioned in the regs in regards to integration is if you have a short plan year (1.401.(l)-5)

which you do not have.

sounds like the person gets 5% of 200,000 + 5% (200,000 - 106,800)

in addition, see 1.401(a)(17)-1(b)(3)(iii)(B)

no proration [of comp] for participation for less than a full plan year......a plan is not treated as using comp for less than 12 months merely because the plan formula is based on comp for that portion which the employee is a participant.

[Jed Macy]

Tom,

Assume that the mid-year new entrant is a new 50% partner (that is, self-employed) and that instead of "hired" in May 2010; that was when he joined as a partner and was never an employee. Let's say his 2011 gross pay was $300,000 but it was really self-employment income. The plan only allows the 5% profit sharing contribution to be based on pay from entry. This partner entered on July 1, 2011. How much "compensation" should his profit sharing be based on?

Is it $245,000 because his SEI is considered earned on the last day of the year?

Is it $150,000 because his SEI is considered earned for plan purposes evenly through out the year?

Is it another amount?

Is there guidance on this issue in the Code or Regs?

Might using $245,000 run afoul of §414(s)(3)?

Thanks for your thoughts,

Jed

[austin3515]

Believe it or not, I have a document that I just read to today which requires proration of the wage base for a new entrant. NEver seen it before though.

[Tom Poje]

lets suppose the person was hired 8/1/2010.

a doctor. a lawyer. whatever.

made 400,000 in 2010.

so he enters 7/1/2011.

still makes boooooka booka bucks in 2011.

so are you saying his contribution would be x% * 245,000 + 5.7% * (245,000 - 1/2 TWB)

I think there are some problems with that.

...........

as to the other question, I'm not sure how you handle things when a self-employed enters mid year. I've never heard that issue addressed before.

[Jed Macy]

Tom,

I agree that "there are problems with that".

You ask:

"so are you saying his contribution would be x% * 245,000 + 5.7% * (245,000 - 1/2 TWB)"?

And I say no, I think the "right" answer is:

x% * ($245,000 * 50%) + 5.7% * (245,000 * 50%) - 1/2 TWB)

Or to put the same equation more specifically:

[5% * $122,500] + [5% * ($122,500 - $53,400)] = $9,580

Your thoughts?

Jed

[Tom Poje]

it doesn't matter when a person enters the plan, if the plan year is a full 12 months the comp is pro-rata-ta-tat

(I guess aside from special language that might be in the doc.)

if Austin truly has a document that says you pro-rata the wage base for a new entrantthen you could have a doctor who has been then for years who gets

245000 * 5.7 + (245000-106800)*5.7 where the new doctor enters midyear and gets

245000 * 5.7 + (245000- 53400)*5.7

[Jed Macy]

Tom,

So it seems the best argument for my calculation that produces a total contribution of $9,580 is from §401(a)(4)'s anti-discrimination requirement. It goes like this: every other participant who entered mid-year on July 1, 2011 was a Non-HCE and only got his compensation from entry included; therefore it would (and should?) be impermissibly discriminatory to include a full year's compensation for the HCE who also entered on July 1, 2011.

Any more thoughts?

Thanks,

Jed

[austin3515]

Here's a ha ha... My dopcujment was referrign to a short plan year. Read too quickly, and gosh I hate those attorney drafted documents