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15% Limit in Partnership

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The deductible limit under section 404 of the code is a plan wide limit and is 15% of eligible compensation (defined by the plan document) which is total compensation of eligible employees reduced by any salary deferrals for cafeteria plans, 401(k), 403(B) or SARSEP (SIMPLE too I assume?????), limited to $160,000.

The individual limits found in section 415 of the Code apply on a participant by participant basis and are the lesser of 25% of compensation (Net Earned Income for partner/self-employed) or $30,000. If your plan allocates on an "integrated" or "new comparability" formula, it is entirely possible for someone to receive an allocation of 22% of Net Earned Income.

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I have a partnership DC plan ( 3 partners & 2 staff ); my understanding is that as long as the total pension deduction for all participants doesn't exceed 15% of total "income" and each participant's allocation doesn't exceed the IRC Section 415 limit, then an individual partner can get, say, a 22% of "earned income" allocation.Is this correct?

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This partnership is an integrated 401(k) plan and only 1 of the 3 partners is deferring at 10,000 for 1998.I set my contribution goal to 15% of total partnership income & then allocated all but 10,000 of this amount. It consisted of a QNEC piece(i.e. neither of the 2 staff deferred)to the staff and the remainder allocated as a profit sharing contribution to all participants.The deferring partner gets a total pension contribution including the 10,000 of 21.6% of earned income, the other 2 partners get 12.3% and the staff get 11.6% each; it weights out to 15%. My hesitation to this stemmed from the fact that each partner takes his deduction individually on his Form 1040 & I thought it would be limited to 15%.But I guess if the total deduction is no more than 15% of income, then the government is satisfied.

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It is important to understand that the _amount_ that the 15 percent rate under IRC 404 (regarding deductions) is multimplied by is a moving target. Generally speaking, be sure that the total deduction (non-owners claimed on 1065 and owner's on 1040) does NOT EXCEED the sum of the following two items:

1. 15% of nonowner compensation (generally W-2) (after reduction for the elective contribution) = _____________, and

2. Pre-plan compensation,

less 1/2 SS tax,

less share of non-owner contr.,

less QNEC,

less P/S,

less elective (up to $10K),


= ____ times 15% = (2) _______.

The owner's plan compensation can only be determined after the employer's contributions for nonowners is known (because amount needed to calculate 1/2 of SE tax), then SE tax, and so on. These claculations can be tested easily by hand, but generating the number in the first instance requires either luck, persistancy, or software. The latter is generally the quickest.

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