Expert: Allen - 1/26/2010

Question
I have a Sole proprietor who sponsors two qualified plans – DB and 401(k)/profit sharing plans.
For example – sole proprietor sch C income is $158,000 and he is the only the participants in the plan.
When you calculate his PS portion which comp do I have to consider – do I calculate 6% of $158,000?
Thanks.


Answer
"Salary" for purposes of calculating plan contributions for a sole proprietor is defined as net Schedule C income reduced by pension and profit sharing contributions and also reduced by 50% of the Self Employment Tax paid on the Schedule C income. The calculation of the contribution is therefore roundabout. If net income is $158,000 and 50% of Self Employment Tax is $10,000 then the plan contribution and "salary" add up to $148,000. If the defined benefit contribution is $70,000 that leaves $78,000 for "salary" and profit sharing contribution. Algebraically salary + 6% salary = $78,000. Salary is therefore $73,585 and the profit sharing contribution is $4,415.
(The calculation assumes that when salary is $73,585, the defined benefit contribution is $70,000). the actuary should have software that can complete these calculations.

One way to increase the contribution is to add a 401k feature to the profit sharing plan. The $16,500 (or $22,000 if the sole proprietor is 50 years old or older) is in addition to the other contributions and is not subtracted from Schedule C income when determining the pension and profit sharing contributions.