employee and employer contribution

I must be having a senior moment here, but let’s say we have an employee with a W-2 of $25,000 and he contributes $23,500 as a deferral, so the net W-2 is $1,500.

The accountant is telling me the profit sharing contribution can not be 25% of $25,000!

I believe he is confusing the higher wage earner whose max contribution includes the employee elective contribution .

Are there other employees eligible for the plan?

The deductible limit is 25% of pay. 
 

But the 415 limit is 100% of pay. Is the participant 50 or older? 

A few things to consider:

• Elective deferrals are not counted in determining the maximum deductible amount.
• The 25% maximum deductible limit applies only to employer contributions (e.g., profit sharing, match...) and is calculated based on total compensation of all eligible participants.  This is not a limit on any individual participant.

The maximum deferral for 2024 was $23,000 and for 2025 is $23,500.  It the participant is over age 50, catch up contribution limit is $7,500 for each year.

If, for example, the employee has W-2 of $25,000 for 2024 and defers $23,000 for 2024, then the employee's net taxable amount for 2024 is $2,000.   Since the employee total annual additions in this case is 100% of pay, then the employee could receive an employer contribution of $2,000 and this would not affect the employee's W-2 compensation of $25,000 nor the employee's net taxable compensation of $2,000.

The calculations are the same for 2025 after adjusting the numbers for the deferral limit to $23,500.  

If the employee is the only eligible participant in the plan, the employer deductible limit is 25% of $25,000 (unreduced for deferrals) which is $6,250.

isn’t the 3% safe harbor based on gross, not net?

As well, with this particular plan, compensation is defined as 415 compensation, w/o adjustment, W22 plus employee compensation.

W2 is shown on some of our plans box 1 is net, some box 5 including deferrals.

No wonder why so many safe harbor and PS plans are calculated incorrectly.

Yes, the SH is based on gross.  Assuming that the elective deferrals were made prior to the allocation of the SH, the plan will have to deal with an excess 415 amount.  The plan document should spell out exactly how to correct the 415 limit when deferrals plus employer contributions exceed the limit (which likely is to refund the deferrals).

If the plan definition is 415 comp w/o adjustment, there are many other forms of compensation that possibly do not appear in either box 1 or box 5 on a W2.

The client will have to provide more information describing their benefits, fringe benefits, pay practices... to get a complete picture.