Discussion:Sec. 401(k) Plan/Profit Sharing Plan

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Discussion Forum Index --> Advanced Tax Questions --> Sec. 401(k) Plan/Profit Sharing Plan
Discussion Forum Index --> Tax Questions --> Sec. 401(k) Plan/Profit Sharing Plan

Jonathanfmartin (talk|edits) said:

13 March 2010

I am looking at a tax return from a predecessor CPA who i know to typically do good work. The S-corporation owner, (only owner and only employee) paid himself wages of $60,000, of which he deferred $12,000 into his 401(k) plan. His Box 1 W-2 wages were $48,000 and Soc. Sec./Mediare were $60,000.

There are no other employees in the S-corp.

Then the prior cpa indicated the following AJE to be booked when transmitting the tax return to the client:

Debit: Employee Benefits $27,000
Credit Accrued Sec. 401(k) Employer Matching $12,000
Credit Accrued Profit Sharing Plan Payable $15,000 (which is 25% of teh wage amount).

On page one of the return, the officer's compensation was deducted at $60,000 ($48K taxable and $12,000 employee deferral). That seems fine. Then on employee benefits, the prior accountant deducted $27,000 of accruals detailed in the above AJE. It seems to me that he over-accrued by $12,000.

This is not an area of expertise for me, and I have requested plan documents from the client. However could it be that there are multiple plans involved (a defined contribution plan and a 401(k) which is perhaps providing this result?

Thanks in advance for your thoughts.

Marty1970 (talk\|edits) said:	13 March 2010
Employer matching is a component of the 25% deduction limit. So I agree its $12,000 too much. 401(k) is an option contained within the frame of a profit sharing plan. Multiple plans do not appear to be present. If there were multiple plans, it would not change the result if all plans are sponsored by the same or a related employer, and the total compensation is still $60,000.

Jonathanfmartin (talk|edits) said:

13 March 2010

Marty1970 - thanks a million - i appreciate the response. That is what I found based on all of my research, but again the return came from a guy I repsect and perhaps it was an oversight, or an error made by his staff. So i began to second guess myself.

Regards,

Jon

Southparkcpa (talk|edits) said:

13 March 2010

I have ONE client with a combination 401K/PSP. They use an actuary who provides us with the accrual.

It seems to me you should be able to ask to see the calculation or if prior year.... did the accrual come off the books via payment to the custodian???

I agree that the 12K match seems high but not absolutely incorrect. BUT.... a 401K can have a match much higher than the 3 to 4 percent we are accustomed to seeing.

Doug M (talk\|edits) said:	13 March 2010
Southpark--if the plan is a defined contribution, why the actuary? Also, the 25% is ER contribution, the $12K is the employee deferral. The EE deferral is taken on the 1040, the 25% ER contribution is taken on the 1120S.

Southparkcpa (talk|edits) said:

14 March 2010

The plan is doe by a financial advisor and the $1500 annual fee includes an actuary so why stick my neck out.

There are over 30 employees, 401K loans, surrenders etc....

I think the real issue here was that a 12K match seems high. On the 1120S, the 25 percent ER is an expense agreed, the ER 12K is part of compensation and DOES not affect the 1120S at all, the remaining 12K "employer match" was the troubling amount that appears to be too high.

Doug M (talk|edits) said:

14 March 2010

Southpark--

Actuaries usually only needed for defined benefit, not defined contribution. That is why I asked.

PS-the most an employer can contribute to the "normal" 401(k) plan is 25% of salaries. So, if you do a 100% match on the EE deferral, you have to take that away from the 25% contribution.

So, if an ER has a 100% match of $12,000, then the profit sharing contribution can only be $13,000.

Hence, you are still limited to 25% of the W-2 wages no matter how you slice the pie. So, that corp. tax return is wrong by $12K in deductions, as the max can only be $25,000.

Doug M (talk|edits) said:

14 March 2010

Southpark-correction to numbers

oops-theory right, numbers wrong. I was thinking $100K salary. It is $60K

max is 25% of $60,000 or $15,000.

must reduce $15,000 by $12,000 "match". (there is no $12K match, I am just trying to use your words to show that tax return is way wrong)

so, profit sharing can only be $3,000. At the end of the day, ER can only do $15K.

But, the corp. return is still high by $12K.

Jonathanfmartin (talk\|edits) said:	14 March 2010
Thanks - I decided to request the calculation and see what they were doing. I agree - the amount looks high by 12K, and the accrued amounts were paid to the plan administrator, so there is likely an over-contribution issue.