Is my salary included for deduction limit?

[Jakyasar]

I am the owner of Company X

Company X sponsors 401k/SH/PS plan

As owner, I am eligible to defer, excluded from SH (as HCE) and do not want any PS (no top heavy issues)

Is my salary included for determining deduction limit?

How about, if I only get SH (assume non-elective 3%)

Thank you

[Bird]

Yes/yes

[Jakyasar]

It is all because I am eligible to defer, correct?

[Bird]

17 hours ago, Jakyasar said:

It is all because I am eligible to defer, correct?

Shrug. Not really. Eligible for PS, just not getting any. If you said eligible to defer and excluded (by plan language) from both SH and PS, I'd have to think about it, but don't really feel like it. Offhand I think eligible to defer is good enough.

[Jakyasar]

Not excluded from PS by way of plan language, just electing not to get any PS allocation, totally 2 different provisions.

[C. B. Zeller]

I have to disagree with Bird on this. The compensation used to determine the 25% deduction limit takes into account only those participants who actually receive an allocation other than elective deferrals. If an employee's only contributions for the year were their deferrals then you do not count their compensation when determining the deduction limit.

[Bird]

7 minutes ago, C. B. Zeller said:

I have to disagree with Bird on this. The compensation used to determine the 25% deduction limit takes into account only those participants who actually receive an allocation other than elective deferrals. If an employee's only contributions for the year were their deferrals then you do not count their compensation when determining the deduction limit.

Mmm, I may have been stuck in the old days when deferrals counted against the (then) 15% limit and so comp used for deferrals would count. I found at least one old thread that backs up C. B Zeller's position on this. 

I guess I stand corrected (but note that giving $1 of PS fixes the problem).

[Jakyasar]

How about if only getting SH and no PS?

Bird, can you provide the link to the old thread?

[C. B. Zeller]

Safe harbor counts the same as profit sharing.

Here is an article from ASPPA from a few years back:

https://www.asppa.org/sites/asppa.org/files/PDFs/GAC/ASAPs/13-05.pdf

[Luke Bailey]

C.B. Zeller, thanks. I was unaware of the issue. I did not read the underlying PLR, but Ms. Ferenczy's article seems to summarize it well. She includes the following in her conclusion:

The position of the PLR is contrary to that which has been stated informally on other occasions, including ASPPA’s Annual Conference Q&A Sessions. [Emphasis supplied.]   Nonetheless, the PLR may represent the current thinking of the IRS on this topic, and those who are including compensation of 401(k)‐only participants in the IRC §404(a)(3) deduction limitation should be on alert that this may be problematic if the plan is audited by the IRS.  One possible solution might be to provide a minimum employer allocation in order to bring in that participant's compensation for the deduction limits.

Bird's $1 contribution is an example of the minimum contribution referred to in the last sentence of the above excerpt from Ms. Ferenczy's article.

The PLR does not seem right to me. Folks who only defer are beneficiaries under the plan. Check. The language "such elective deferrals shall not be taken into account in applying any such limitation to any other contributions" seems intended to mean that the deferrals don't crowd other contributions, e.g. profit sharing, out from under the 25% of compensation limit, not that the compensation of folks who only have deferrals doesn't count. Congress said, "such elective deferrals shall not be taken into account...," not "the compensation of the participants making those elective deferrals shall not be taken into account."

[Bird]

19 hours ago, Jakyasar said:

Bird, can you provide the link to the old thread?

My senile computer is being an a-hole and won't copy and paste, but the thread is titled "Calculating 25% of eligible compensation for deductibility limit." Google that or search within BL and it should come up.

[Jakyasar]

Thank you 

[Jakyasar]

I remember seeing somewhere, just $1 (or a very very small amount) is not a reasonable amount as a de minimus contribution. Something from the IRS.
If I find it in my notes, will share it.