Self employed PS calc and integrated with Social Security

[Cobras59]

I have a one owner company with K-1 income and the CPA is calculating the maximum that can be contributed on the IRS SEP,401K worksheet.  The Plan document says that the contribution is integrated with SS at 100% of the TWB, 4 tier.   There is one non-owner is under the SSTWB.  When calculating the contribution for integration, can the contribution % to the non-owner be less than what the maximum that owners contribution calculation is? For example, owners maximum contribution calculated is $29,000, which is 20% of his net earned income.  The employee is getting 6%.  Is that allowable?

[Mike Preston]

No. What kind of entity is it?  S-Corp? Partnership? Sole Prop? 

[Cobras59]

I believe it is a Sole-Prop.  The CPA is calculating the maximum on the 1040 Keogh/SEP/Simple Worksheet and that is what they are contributing for the owner.  Then they are giving the non-owner a %, who's compensation is under the Social Security Taxable Wage Base.   The document says the contribution is integrated, and with the 4 tier, the last step is comp to comp.   

If the owner gets the maximum of $29,000 total.  That is 20% of his net earnings from self-employment income.   With the integration, his total contribution before the last tier, comp to comp, is 9,399.64.  the non owners contribution before the last tier is $1976.76.  The owners comp is $146,653 and non owners is $34,680.  So what is the contribution amount for the last tier comp to comp?  Attached a sample allocation.

Copy of Sample - Integrated contribution calcs.xlsx

[Mike Preston]

Sole props don't have K-1 income.  Are you sure it is a K-1?

[Cobras59]

All I have is a copy of the worksheet for the contribution calc.  Step 1 of the worksheet has - Enter the net profit from line 31, Sch C; line 3, Sch C-EZ; line 34, Sch F; or box 14, Code A*, Sch K-1.  the CPA has told me that he gets K-1 income.  So maybe it's a partnership.  Will have to verify with her.

 

[Mike Preston]

Your 2-tier calculation looks right to me.  The 4-tier calc is messed up in more ways than I have time to describe. 2-tier and 4-tier are identical as long as the allocation is more than 5.7% of all pay  plus 5.7% of excess  pay.

If it truly is a sole prop you will need another iterative calculation that revolves around the amount allocated for the non-owner.  Good luck.

[Cobras59]

Thank you for help!

 

[Bird]

To expand on and emphasize what Mike said...

• If this is a sole proprietor, or effectively a one-man partnership of some sort, you (someone) needs to subtract the contributions from the net income before contributions to determine compensation for plan purposes.  I'd say it is very likely that that is closer to $100,000 for the owner than the $146K shown (unless the $146K has already been reduced by the assumed contribution...I'm skeptical about that and in any event it's not that simple or direct).
• setting aside that issue, the math/formulas in the 4 tier spreadsheet are ok up to the point of the subtotal.  After that, things break down, to be polite.  Actually the comp to comp allocation following the subtotal is accurate, but based on a number that appears to be random, and the "TOTAL CONT" is accurate as far as the math goes, although it is not in fact the max nor the total desired.  Going from that number (4600 for the employee) to "Amount allocated" (2080 for the employee) is...well, it's just wrong.  I take some pride in figuring out why people do things wrong so I can explain it and help them understand, but I'd need some of what they are smoking to have a chance of doing so.

[Cobras59]

Was trying to back into what the company had actually deposited for the participant.  The 4th tier should be what is left of the total contributed to the Plan.    thank you!

 

[Cobras59]

Verified that it is partnership.  Only one partner is taking income from it.  They are using the Schedule SE to calculate the maximum for the owner and then giving the non-owner a %.  Even if integrated, his contribution % is 20% and the non-owners is 6%, which is discriminatory.  So, have to let them know they need to contribute more for the non-owner.

 

[Mike Preston]

5 hours ago, Cobras59 said:

Verified that it is partnership.  Only one partner is taking income from it.  They are using the Schedule SE to calculate the maximum for the owner and then giving the non-owner a %.  Even if integrated, his contribution % is 20% and the non-owners is 6%, which is discriminatory.  So, have to let them know they need to contribute more for the non-owner.

 

Maybe.  If your original claim that the document formula is based  on either a 2-tier or 4-tier method is correct, then 20% to the owner coupled with 6% to the non-HCE is a  violation of plan terms.  If the actual document provisions provide for each participant in their own group then 20% to the owner and 6% to the non-HCE not only would not be a violation of plan terms but it also might satisfy non-discrimination and not be discriminatory.