 NEWSLETTERS Volume 9, Issue 2 .................... June 2009 How the Annual Compensation Limit Affects your Contribution Calculation Annually the IRS provides various limits on qualified retirement plans. One of those limits applies to the dollar amount of compensation that will count for plan purposes. The compensation limit is known as the Internal Revenue Code section 401(a)(17) limit. For 2009, the compensation that will count for plan purposes is limited to $245,000. Employer or match contributions to the plan should not be calculated on wages over this limit. For example, assume a business owner is under age 50, will have compensation of $490,000 for 2009, and gets paid evenly throughout the calendar year. - If the plan makes a profit sharing contribution of 2% of compensation, the owner’s profit sharing contribution would be $245,000 * 2% = $4,900. The owner’s profit sharing contribution would NOT be $490,000 * 2% = $9,800. The owner’s profit sharing contribution would be 2% of the $245,000 IRS compensation limit for the 2009 plan year only. - If the plan makes an on-going match contribution of a 50% match on the first 6% of compensation deferred, and the owner makes 401(k) contributions of 6% of compensation each pay period, the owner’s matching contribution will be $245,000 * 6% * 50% = $7,350. Please also note, because the match contribution is made on-going and the owner will reach the compensation limit of $245,000 in June, his match contribution will stop in June. Because the match in this example is made on-going, if the owner did not make 401(k) contributions evenly, he would potentially miss match contributions because his match contributions would stop when his compensation reached the limit. If the match contributions were calculated on an annual basis, rather than an on-going basis, this would be a non-issue as the timing of the compensation received would not be relevant. Remember as you process the payroll that the compensation limit for the year needs to be taken into consideration. If you have any questions about
how the annual compensation limit affects your contribution calculation contact
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