Self-employed compensation calculation

[bevfair]

I'm working on a calculation of employer match for a self-employed participant/plan.  The plan has 10 common law employees.  We're transitioning from one software provider to another.  The provider we've used for many years, includes the salary deferrals of the participants in the common law plan cost.  The new software provider only includes the employer match in the common law plan cost.  While this doesn't impact my match calculation directly, it does impact the resulting plan compensation for the my self-employed.  So my question is, which software provider is correct?  I've not had any luck doing a search to see if this has come up before and reading the SE instructions hasn't been helpful either.  Thanks.

[401king]

The employee deferrals should have already reduced the compensation that you're starting with for the employer (i.e. payroll expenses, and all other expenses). 

[Mike Preston]

While not completely impossible for some purposes, it is very rare indeed for salary deferrals to reduce plan compensation for those who are not self-employed.  While you didn't imply that either your current or prior software does that, I just wanted to make sure there is no confusion about that.

As far as including the salary deferrals in the common law plan costs, again, that usually isn't done because the salary from which the deferrals are taken already are a cost on the employer's tax return and taking a deduction for those same dollars as a cost of the plan is not proper.

However, note that salary deferrals *DO* count for 415 purposes.

[bevfair]

Mike - neither software is reducing plan compensation for salary deferrals for non- self-employed individuals.  But one does reduce plan compensation for the self-employed by the deferral 'cost' of the non- self-employeds.  Based on what you and 401king are saying, I take that to mean that in essence it is doubling the use of those deferrals in the SE compensation calculation and that is not correct.

[Bird]

I agree it is incorrect.  Makes we wonder if you are talking about a retirement plan software system, in which case I can't imagine that kind of error, or an accounting software system, in which case I can imagine it.

[bevfair]

Bird - it is a retirement planning software.  Perhaps there is new coding that needs to be done that I'm not aware of.  I'm going to reach out to them. 

Thank you all for the input and clarification.

[Bird]

OK but to be clear, it sounds like the old software provider was incorrect and the new one is correct.

Quote

The provider we've used for many years, includes the salary deferrals of the participants in the common law plan cost.  The new software provider only includes the employer match in the common law plan cost.

 

[bevfair]

That exactly correct.