Schedule C income

I have a couple of DB plans of sole proprietors, Schedule C.

I know the combination of "compensation" for benefit calculation plus contribution can not exceed the Net Schedule C for the year.

However, I have seen other DB plans for sole proprietors wherin the contriubtion plus "compensation" exceeds theNet Schedule C.

How can this be?

Bad actuarial work?  Bad accounting work?  I have seen it as well, but that doesn't mean it is correct.  We recently took over a plan where contribution exceeded the Net Schedule C, which at best means comp = $0.  Makes for a very low 415 max.  

Also, just to be clear, there is also a required adjustment for self-employment taxes that needs to be accounted for.

Well the DB plan has a minimum required contribution which may be larger that the Schedule C net income. In that case your income for the year is $0 (probably) and you may have a nondeductible required contribution to the Plan. Depending on when it's deposited you might be able to kick the can into next year by designating different years for MRC and deduction.

I ran across a plan of another TPA who averaged the Schedule C's on the basis the plan calls for highest consecutive 3 year average.

I don't think you can do that.

Average compensation is used to determine an individual's 100% of comp 415 limit. If you have a high enough limit when the plan starts, from historical earnings, then having future net after-pension earnings go to zero isn't usually an issue. You just need to manage the timing of funding so that current non-deductible contributions can be deducted in the subsequent year. Depending on SE earnings in future years, you might be playing that time lag game consistently.

You've got apples and oranges you're juggling. You need to make sure that (1) minimum required contributions are funded by 9/15 of the following year (or off-calendar equivalent) and (2) the deduction does not exceed the SECA adjusted net SE income and nothing that is not deductible is contributed during the year.