deduction limit

[Dougsbpc]

Suppose you have a profit sharing plan where one of the participants had no contribution or forfeiture allocation. Can that salary be used for the 25% deduction limit?

I think not. Does anyone agree? Disagree?

Thanks.

[Tom Poje]

if the person receives no ps or forfeitures then the general rule is you do not included the compensation.

if the person received a match because they deferred then the compensation is included.

if the person had deferrals only (or for that matter, could have deferred but didn't) it is a debatable issue. I've heard arguments either side.

years ago, deferrals counted toward the deduction limit, so at that point you would include someone who could have deferred but didn't because they were considered benefitting. now that deferrals are no longer included toward the deduction limit the answer is a bit clouded. (e.g. is it a natural consequence that logically you should not include someone who receives no other contributions (besides the possibility of deferrals) since the deduction rules changed)

[david rigby]

Not exactly on point, this is the only Gray Book Q&A that seems even close to your question:

Gray Book QUESTION 2007-10

Deductible Limit: Section 404(a)(7) Compensation with Elective Deferrals

An employer sponsors a defined benefit plan and a profit sharing plan. Some employees are only eligible to make unmatched deferrals under the CODA in the profit sharing plan. Of that group, some choose to defer and some choose not to do so. IRC §404(n) makes it clear that any deferrals actually made are not subject to the combined plan limit of §404©(7) and are not taken into account in applying that limitation to any other contributions. But, it is not clear whether or not compensation paid to employees who make deferrals (or are eligible to make deferrals) is taken into account in applying §404(a)(7).

a) Should the compensation of an employee (who is not a DB plan participant) who defers under a profit sharing plan be taken into account in calculating the combined plan limit if that deferral is the only allocation of the employee?

b) Should the compensation of an employee (who is not a DB plan participant) who is eligible to defer under a profit sharing plan be taken into account in calculating the combined plan limit even if no deferral for the year is actually made and no other allocation is provided?

c) Would the answers to a) and b) be any different if the plan provided matching contributions for all deferrals?

RESPONSE

a) Yes.

b) No.

c) No.

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[PensionPro]

Who do you include in the deduction limit calc -- participants who are eligible to receive match or participants who actually receive the match?

[PensionPro]

Any feedback anyone? Thanks.

[ESOP Guy]

We always use participants who are eligible to receive a match. To be clear by that I mean people who had they deferred would have received a match. Or to put it in the negative the reason they didn't receive a match is they didn't defer.

I think the rules are rather clear on that issue.

[PensionPro]

I would be curious to know where the rules are clear on that issue. So far I am seeing the following language (emphasis mine) ...

1) From PLR 201229012, "taking into account only those employees who have allocations other than elective deferrals."

2) Latest EOB's commentary on the PLR is "the deduction limit is determined by taking into account only the aggregate compensation of the employees who participate in the allocation of the employer contribution to the plan for the year for which such contribution is made."

Am I missing something or are you referencing the 410(b) coverage rules? Thanks for clarifying!

[Mike Preston]

It just is.

[ESOP Guy]

I didn't find a cite quickly. I am sure someone out there has it.