Is my salary part of the deduction limit?

Hi

Revisiting with a few scenarios:

Scenario 1: 401k with basic match and PS provisions (everyone in their own group)

Participant does not defer thus no match and gets $0 ps allocation, is this participant's salary included in overall deduction limit?

Scenario 2: 401k with NESH 3% and PS provisions (everyone in their own group)

Participant does not defer, gets 3% NESH and gets $0 ps allocation, is this participant's salary included in overall deduction limit?

Scenario 3: For either above scenarios, participant is categorically excluded from PS portion, is the salary excluded for deduction purposes?

Any other scenarios where salary needs to be excluded for deduction (other than being categorically excluded)?

Thanks

1. Not included

2. Included

3. Not included

For purposes of determining the deduction limit in a profit sharing plan, you only count the compensation of employees who are beneficiaries of the plan, defined as anyone who actually receives a contribution for the year.

Agree with CBZ with a caveat for #3 that assumes the categorical exclusion relates to all employer contributions under the plan (i.e., not excluded for SHNE but excluded for PS). 

Agreed with above.

Cuse - just to make sure I understand what you are saying - you are saying that if the employee receives the 3% SH, but is excluded for purposes of "regular" PS, the compensation is INCLUDED for purposes of the 404 deduction? Or are you saying something different?

As is often the case in our industry, a complete response to a simple question can be incredibly complex.  There are general rules that help us focus.

The employer's deductible limit is calculated based on sum of the compensations for all common law employees who receive a contribution made by the employer.  Most commonly, this deduction is a business expense for the employer under section 162.  There is no distinction by the type of employer contribution made when calculating the deduction limit.  For DC plans, this includes match, PS, SHNEC, SHM, QNEC, QMAC, or whatever other labels may apply to the employer contribution.

The deduction rules pre-date ERISA and certainly 401(k).  To provider a flavor for the types of issues that come up, early on after ERISA there was a rule of thumb that if an employee was considered benefiting under 410(b), then that employee could be included in the deduction calculation.  When the IRS took the position that elective deferrals were employer contributions and that anyone eligible to defer was participating, some took it to mean the compensation for anyone eligible to defer could be used in calculating the deduction limit.  The IRS nixed the idea in  PLR 201229012 basing their interpretation of the provision that said elective deferrals are not subject to the deduction limit.

4 hours ago, Belgarath said:

Cuse - just to make sure I understand what you are saying - you are saying that if the employee receives the 3% SH, but is excluded for purposes of "regular" PS, the compensation is INCLUDED for purposes of the 404 deduction?

Yes

I agree there - PS and SH are in the same disaggregated "plan" for purposes of determining who's benefiting (and therefore in the 404 calculation)

Agreed with all above and thank you for your comments. This was a reminder exercise, need it from time to time. Thanks for this group of experts.

Thanks Cuse. I assumed that was the case, but wanted to make sure. If it had been otherwise, I'd probably have had palpitations.

Doesn't your software calculate the deduction limit for you?

If you are asking me, yes it does but I am not 100% sure always correct due to various scenarios. As I mentioned before this is a reminder exercise.

True.  From time to time I do a calc for myself and check vs Relius (or Datair or whichever the software du companie is).

If I'm off, it's my mistake, not the software.