Is the salary included for 6% limit?

[Jakyasar]

Hi

Sorry if was asked before.

DB/DC plan combo, covering 2 owners only (no PBGC). Each has 100k of salary

DC plan has 401k and PS provisions only - no SH match

Owner Joe has deferral and PS

Owner Mary has only deferral and no PS

What salaries are included to determine the maximum 6% PS deduction?

Assume DB contribution is 500k so will never satisfy 31% rule.

Thanks

[DavidO]

You can only count compensation for the 6% or 25% limit from employee's that are receiving an allocation. So in your case, only Joe.

Look at Code Section 404(n). It excludes including deferrals in calculating deduction limits.

[Jakyasar]

I do not think 404n states that, it simply say, deferrals are not part deductions

(n) Elective deferrals not taken into account for purposes of deduction limits

Elective deferrals (as defined in section 402(g)(3)) shall not be subject to any limitation contained in paragraph (3), (7), or (9) of subsection (a) or paragraph (1)(C) of subsection (h) and such elective deferrals shall not be taken into account in applying any such limitation to any other contributions.

[truphao]

Jakyasar, I agree with you.   I believe you get to use the full $200,000 or $12,000 PS.

[C. B. Zeller]

I agree with DavidO. You only count compensation for employees who actually receive an allocation of the profit sharing contribution. The IRS's position is that an employee who only benefits under the 401(k) portion of the plan doesn't count for 404, because of 404(n). See PLR 201229012.

[Paul I]

There are two sides to the discussion you can see in the two attached commentaries - one authored by Ilene Ferenczy and the other by Derrin Watson.  Also note the following guidance appears in IRS training material:

"Chapter 9 Verifying 404 Deductions for Defined Contribution Plans Who is Benefiting under the Plan?
Since the IRC 404 regulations do not define who is “benefiting”, the IRC 410 regulations governing coverage and how to determine which participant is considered benefiting should be used to make this determination. In general, in order to be considered benefiting an employee must share in the employer contribution. This would include Participants that received only a top heavy minimum allocation under 416 and those that only received a forfeiture allocation (if it was allocated in the same manner as contributions).
With a 401(k) plan, participants only have to be eligible to defer to be considered benefiting. Therefore participants who are eligible to make salary deferrals during the tax year (whether or not deferrals are actually made) are considered to be benefiting and their compensation is included in determining the limits under IRC 404(a)(3). See T.R. 1.410(b)-3(a)(2)."

As the commentaries note, the PLR does not establish a precedent upon which others can rely.  The technical analysis and training materials also carry very little if any weight in a discussion with the IRS.

Pick your story and stick to it.

ASPPA ASAP PLR201229012.pdf FIS Technical Update PLR 201229012.pdf

[truphao]

interesting, learning something new all the time....I always thought of this situation as requiring to exclude compensation for those who are NOT eligible for PS compensation (vs not receiving it).  Following the strict reading of the cited PLR 201229102 what would be the reasonable amount that would allow to include Mary's compensation toward 6% limit?  $1,000, or, $100, or $1?  I am assuming Mary is eligible for PS but simply not getting it because of tax considerations here......

[Bird]

3 hours ago, Paul I said:

There are two sides to the discussion you can see in the two attached commentaries - one authored by Ilene Ferenczy and the other by Derrin Watson.

Thanks for posting; this all sounded familiar. Derrin's argument (that you get to count compensation that is eligible for 401(k) contributions, even if a participant doesn't get an employer contribution) sounds fine in theory, but I wouldn't want to have to argue it to an IRS agent. Giving some PS eliminates that hassle.

3 hours ago, truphao said:

what would be the reasonable amount that would allow to include Mary's compensation toward 6% limit?  $1,000, or, $100, or $1?

I'd be comfortable with $500...maybe $250. Not $1.

[Jakyasar]

Allow me to take it up a notch and make an argument - good or bad

From FIS attachment Paul provided "In Private Letter Ruling 201229012, the IRS ruled that a plan does not include the compensation of a participant who is only eligible for the elective deferral portion of the plan (i.e., not benefiting under the nonelective or matching portions of the plan)."

In literal reading, it states that "the participant is only eligible for deferral" i.e. excluded from PS portion of the plan. If I read this literally, I agree that the compensation is not included in 404

On the ASPPA-ASAP, last paragraph, 6th line from the bottom, it states "401k only participant". Again, in literal reading, possibly excluded from the PS allocation.

Let's keep in mind that a PLR is an opinion and not the law and specific to a certain plan.

Just playing both sides here.

IMHO, always provide a minimal allocation, whatever you are comfortable with but definitely not $1 unless the salary is $10 or less.

[truphao]

may be the "reasonable amount" should be thought of in %-ages? 0.1%, 0.25%. 0.5%, 1.0%?

[Bri]

If an allocated amount is enough to qualify for the "active participant" box on the W-2 (which affects the taxpayer's IRA deductibility) then why shouldn't it be good enough to count for 404 purposes?

[Bird]

26 minutes ago, Bri said:

If an allocated amount is enough to qualify for the "active participant" box on the W-2 (which affects the taxpayer's IRA deductibility) then why shouldn't it be good enough to count for 404 purposes?

Totally different purposes, and timing of contributions as well might make one an active (or inactive) for the W-2 while vice versa for other purposes such as this.