Profit Sharing Calculation

[justatester]

Hi-

I have a client that allocates the profit sharing contribution on a per payroll basis. The formula is 9% of compensation (6% on one definition of compensation & 3% of another definition of compensation). They have a number of employees (almost of them HCEs) who hit the $250,000 limit in March..therefore do not receive any ps contribution after that. So, on an annualized basis, they are only receiving 4.5% contribution. The formula in the plan document is discretionary. Is this method of allocating the contribution ok?

[BG5150]

The client may send in the PS per payroll, but what does the document say is the basis of the PS? Per payroll or annual?

I don't think I have any clients that do PS per payroll. match, yes, but PS, no.

[Lou S.]

The client may send in the PS per payroll, but what does the document say is the basis of the PS? Per payroll or annual?

I don't think I have any clients that do PS per payroll. match, yes, but PS, no.

We have a few who send it in but none who have a split definition of comp for calculating parts of the PS. Most of the ones who do it are 3% non-elective safe harbor who send the 3% in each payperiod. They do this mostly for cash flow so they don't get hit with a huge year end contribution.

The definition of comp for PS is generally annual pay so sometimes a "true-up" is needed if they mess up on the deposit calcs.

For the OP I would agree he check out the definition of compensation in the plan document.

I also don't understand the OP's comment that it is 6% on one definition and 3% on the other coming up with 9% total. For exmple maybe it is 6% on base pay and 3% on bonus. An employee's total allocation that case will aways fall somwhere beteween 3% and 6% of total pay. Unless some compensation is counted in both calcs an employee's allocation will never exceed 6%.

Now if an employee has anual pay over the comp limit that should be getting the 6% rate and the plan cdocument bases it on annual pay, it sounds like some true up calc may be required to make them whole.

[masteff]

Am I missing how this is NOT a trick question? Last I understood the rule, a plan can't allocate contributions over the comp limit. So PS should cut off at the comp limit. When the OP is doing an annuallized calc, he has to cap the comp or the calc will always look short.

If the company wants to give PS to HCE's above the comp limit, it has to be in non-qualified plan.

Or have I missed a major change in the last couple of year?

The client may send in the PS per payroll, but what does the document say is the basis of the PS? Per payroll or annual?

I don't think I have any clients that do PS per payroll. match, yes, but PS, no.

Larger companies often do this frequently. I had plans that had both match and PS, both were paid per payroll but the match had a true up. If your payroll system is properly programmed, PS should never need a true up.

[justatester]

Ok...Here is how the calculation works:

6% based on eligible compensation minus bonus amounts. (where eligible compensation is less than 415 due to other exclusions)

3% based on bonus amounts

So, I making $200,000 in monthly eligble compensation, plus $52,000 "bonus/incentive pay" monthly. So as of March 1, I have $400,000 in eligible pay, plus $104,000 in bonus/incentive pay. For the 6% contribution, I take $250,000 minus $104,000 for a total of $146,000 X 6% for ER contribution of $8760. For the 3% contribution, I take the $104,000 x 3% for ER contribution of $4380. This is compenation as of 3/1/12. I then receive no additional ps contributions.

At the end of the end of the year, I have $2,400,000 in eligible compensation and 630,000 in bonus compensation. So, but based on the YTD compensation being limited to 250,000, I would have expected to see $15,000 from the 6% contribution and $7500 from the 3% contribution...for a total of $22,500.

The plan is on a prototype document with a discretionary formula. The document indicats it is to be allocated among eligible participants in porportion to Plan Compensation for the Plan Year.

Hope this makes the question a little clearer...

[BG5150]

Which comes first? Bonus comp or regular comp?

What if I made $1,000,000 Through the middle of December and a bonus of $150,000 was paid to me at the end of the year.

My PLAN comp is still going to be $250,000. Do I get 6% of that? 9%? 3%?

[rcline46]

Based on what you said, I would see more of a ratio - 73.75% Base and 25.25% bonus, giving 184375 times 6% or 11062.50 base and 65,625 times 3% or 1968.75 for a total of $13,031.35 (if I did the math right). Your case I dont see at all. Some how you are double using the bonus pay to get the $7500 because us already used the the full $250,000 as base pay. How can you use it again?

[ESOP Guy]

Ok...Here is how the calculation works:

6% based on eligible compensation minus bonus amounts. (where eligible compensation is less than 415 due to other exclusions)

3% based on bonus amounts

So, I making $200,000 in monthly eligble compensation, plus $52,000 "bonus/incentive pay" monthly. So as of March 1, I have $400,000 in eligible pay, plus $104,000 in bonus/incentive pay. For the 6% contribution, I take $250,000 minus $104,000 for a total of $146,000 X 6% for ER contribution of $8760. For the 3% contribution, I take the $104,000 x 3% for ER contribution of $4380. This is compenation as of 3/1/12. I then receive no additional ps contributions.

At the end of the end of the year, I have $2,400,000 in eligible compensation and 630,000 in bonus compensation. So, but based on the YTD compensation being limited to 250,000, I would have expected to see $15,000 from the 6% contribution and $7500 from the 3% contribution...for a total of $22,500.

The plan is on a prototype document with a discretionary formula. The document indicats it is to be allocated among eligible participants in porportion to Plan Compensation for the Plan Year.

Hope this makes the question a little clearer...

The rest of the conversation is interesting but if I read the highlighed portion correctly there has to be a true up. This says the alloation is based on Plan Comp for the Plan Year. If they are depositing the money that is just the sponsor putting profit sharing money into the plan as the year goes on before it is allocated. Unlike 4k money PS money can be put in and not allocated as put into the plan. The allocation appear to happen once a year NOT on a by payroll basis. The fact they deposit it on a payroll basis doesn't control the plan does and to me that is an annual calc. My GUESS is the prototype does NOT say anything about a by payroll allocation of the PS. So the "how deposited" is irrelevant to the calc.

Just my take on this one.

[david rigby]

The document indicats it is to be allocated among eligible participants in porportion to Plan Compensation for the Plan Year.

Isn't "Plan Year" the important thing here?

[BG5150]

Also, if it is done "pro rata" you can't have salary get 6% and bonus get 3%. Somebody with $70,000 salary and $30,000 bonus gets $5,100 (5.1%), but someone with just $100,000 salary & no bonus gets $6,000 (6%). So that cannot be pro rata.

[masteff]

Assuming your intent is that participants can max PS at 6% regardless of comp like in your scenario, the easiest way to do it is to not apply the comp limit inside the calculation but at the result. Remember that while you can't use more than the comp limit in determining a benefit, you can control how and where it gets applied.

All your payroll software need to is complete the calc and then apply an annual limit on the PS contribution itself.

To apply this logic to your scenario above:

Lesser of { 6% * ($504K-$104K) + 3% * $104K } or { 6% * $250K }

which equals

Lesser of { $24K + $3120 } or { $15K }

Since the person received $13,500 in PS for January, then in February, they'd receive an additional $1,500.

In March, you again do the calc, but the person's already maxed out so they get $0 additional PS.

The PS benefit that the participant receives is in full compliance with the comp limit.

Of course a lot of payroll software cannot handle a YTD calc so you'd still want to review at year end for possible true ups.

[justatester]

Ok...So I finally figured out what the client is doing...They are not allocating the ps on two different rates...they are just using a complex calculation to get to the allocation.

The ps compensation is "eligible compensation" less 50% of the bonus amounts...so in my example:

As of March 1, I have $250,000 in "eligible" compensation less 50% of my ytd bonus (50% of 122,134 ytd bonus) = 188,933 of ps compensation. Total allocation = $11,335.98. So, I get what they are doing...now the question...is this allowable on a prototype?

Also, we need to run a 414s test. Would this been done on "Plan Year" definition of compensation? Or what the allocation was actually made on?

In my example above, they have total compensation of $5,000,000, bonus compensation of $630,000 of which only $315,000 is ps eligible. Which leaves $4,685,000 in PS eligible compensation. So for the 414s test, would I use $250,000 as Total compensation and $250,000 as plan compensation? Or, would I use what compensation was actually used for plan compensation ($188,933-from above)?