If a plan sponsor maintains a profit sharing plan with 401(k)provisions, how is the 15% deductibility limit under Section 404 determined?

Do you use the compensation of a participant ,who deferred a portion of his/her salary during the plan year and then terminated prior to the end of the plan year, when determining the maximum profit sharing contribution that can be made(assume 1,000 hrs./last day requirement)?

Also, for 404 purposes, do you use full year compensation or date of entry (if defined in the plan document)?

Thanks

From memory, you use compensation for all participants who are eligible to defer (note that this may cause problems if you have different populations for deferrals and PS contributions). And I believe the 404 regs permit you to use total comp, not just eligible comp. Watch out, I didn't look this up.

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Jon C. Chambers
Principal
Schultz Collins Lawson Chambers, Inc.
(415) 291-3004

If eligible, include comp. 401(k) is part of PSP plan, even if a separate plan.

404 always uses annual pay UNLESS there is a change in the plan year.

I'm still unclear whether I should include compensation for terminated participants who were eligible to defer, but not eligible to receive a profit sharing contribution for 404 purposes.

Moderator: Could you please respond with the correct answer to this question.

Thank you.

Joe Vasko,

I'm not the moderator, but the answer to your question is yes - you may include comp for those people who were eligible to defer under the 401(k) provision but not eligible for the PS contribution. See the following:

Code Section 404(a)(3)(A)
Treas. Reg. 1.410(B)-3
Q&A #82 from IRS Answers at the 1996 ASPA Conf.

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Andy Treece

Andy Treece,

Thank you for your help!

Joe Vasko