Maximum Deductible Contribution - 2-person Plan

I just want to make sure I'm accurate in this.  A Plan has two participants, a husband & wife, both of which are deferring th maximum 401(k) contribution for the year:

Husband - $100,000 salary
Wife - $23,000 salary

Wouldn't the maximum deductible contribution be 25% of the total between them ($123,000 x 25%)?

I know the wife's full salary is being deducted as a 401(k) contribution, but couldn't we still use her salary and give the husband the total 25% of their combined salaries as a profit sharing contribution since her salary is still technically eligible income?

Thanks in advance!

No. Elective deferrals are disregarded for purposes of the 25% limit - see IRC 404(n). Therefore a participant whose only contributions are elective deferrals is not considered to be benefiting for purposes of 404(a)(3). Therefore their compensation is not included in applying the limit. In other words, in order to count her comp towards the deductible limit, she would have to receive some profit sharing.

Is the wife over age 50? If so, give her up to $7,500 (or more, if she's 60-63) in profit sharing. Her deferrals will be reclassified as catch-up, due to exceeding the 100% of comp 415 limit, and she will have some profit sharing so her comp will count towards the deductible limit.

So if we re-classify some as of her 401(k) as a Catchup (say it's $15,500 as her 401(k) and $7,500 as catchup), she can then get 25% of the $7,500?

I also thought it was 25% of eligible compensation & deferrals:

"25%¹ of all participants' compensation,² plus amount of elective deferrals made."

So my thought was the total compensation is $123,000, therefore he could get 25% of that or $30,750 (instead of just 25% of his $100,000).  Is her salary solely not included because she deferred it all?

4 minutes ago, C. B. Zeller said:

No. Elective deferrals are disregarded for purposes of the 25% limit - see IRC 404(n). Therefore a participant whose only contributions are elective deferrals is not considered to be benefiting for purposes of 404(a)(3). Therefore their compensation is not included in applying the limit. In other words, in order to count her comp towards the deductible limit, she would have to receive some profit sharing.

Is the wife over age 50? If so, give her $7,500 (assuming 2025) profit sharing so that some of her deferrals will be reclassified as catch-up.

$30,

I'm not necessarily trying to get a Profit Sharing contribution for her.  I'm more looking to use her salary to get him a bigger Profit Sharing contribution (if that makes sense).

The rule is that a participant has to receive at least some profit sharing in order for their comp to count towards the 25% limit.

I don't know what source you are citing, but I imagine the author just meant that the definition of compensation used to apply the 25% limit includes deferrals, which is true.

You can't just reclassify deferrals as catch-up because you want to, you have to exceed a limit. That's why I suggested giving some profit sharing in order to a) intentionally exceed the 415 limit, causing some deferrals to be reclassified, and b) make her compensation eligible to be included in the 25% limit.

If she's under 50, and hasn't deferred the entire $23,000 yet, then she could also reduce her deferrals to make room for some profit sharing.

5 minutes ago, C. B. Zeller said:

The rule is that a participant has to receive at least some profit sharing in order for their comp to count towards the 25% limit.

I don't know what source you are citing, but I imagine the author just meant that the definition of compensation used to apply the 25% limit includes deferrals, which is true.

You can't just reclassify deferrals as catch-up because you want to, you have to exceed a limit. That's why I suggested giving some profit sharing in order to a) intentionally exceed the 415 limit, causing some deferrals to be reclassified, and b) make her compensation eligible to be included in the 25% limit.

If she's under 50, and hasn't deferred the entire $23,000 yet, then she could also reduce her deferrals to make room for some profit sharing.

Got it, thanks.  So if we give her Profit Sharing, we can then reclassify the 401(k) as a catchup contribution?

So technically she'd receive contributions greater than 100% of compensation?

I just always was told it was eligible compensation, so if an HCE opts not to receive a Profit Sharing contribution their compensation is still included in calculating the 25% deductible limit.  I guess that's not actually accurate?

8 minutes ago, metsfan026 said:

Got it, thanks.  So if we give her Profit Sharing, we can then reclassify the 401(k) as a catchup contribution?

Assuming she's catch-up eligible, then yes.

8 minutes ago, metsfan026 said:

So technically she'd receive contributions greater than 100% of compensation?

Yes.

9 minutes ago, metsfan026 said:

I just always was told it was eligible compensation, so if an HCE opts not to receive a Profit Sharing contribution their compensation is still included in calculating the 25% deductible limit.  I guess that's not actually accurate?

My understanding is that this is how the IRS applies the rule under audit. A participant's comp is not counted unless they benefit under the plan for the year, meaning that they actually receive some dollars, and deferrals don't count.

3 hours ago, C. B. Zeller said:

A participant's comp is not counted unless they benefit under the plan for the year, meaning that they actually receive some dollars, and deferrals don't count.

100% agree - the deduction limits apply to the eligible compensation of employees who benefit under the plan.

4 minutes ago, CuseFan said:

100% agree - the deduction limits apply to the eligible compensation of employees who benefit under the plan.

I'm not arguing, it just seems odd to me that if a Highly Compensated Employee opts not to get a contribution in the Profit Sharing Plan his/her salary is excluded from the calculation since they are still benefitting/participating in the Plan.  They just aren't getting a share of the Profit Sharing monies.

Keep in mind with FICA taxes, Gross Wages of $23,000 will result in a deferral amount less than that, so that is where there is a little room for a PS allocation.

The decision as to whether someone gets a PS contribution should be made by the EMPLOYER not the specific HCE unless it is an owner-only plan. If the EMPLOYER was smart, they would give a particular HCE a nominal amount so such HCE's compensation may be used in the deduction determination.