Laymen Terms – Exclusion of Elective Deferrals From Deduction Limit

[Guest JimJ]

Can someone tell me in simple terms what has changed beginning in 2002 concerning elective deferrals? I have been told by our administrator that deferrals will no longer be counted towards the allowable deduction amount. What does this mean to us and how can it benefit our HCE’s. Thanks, JJ

[R. Butler]

Currently profit sharing plan contributions are limited to 15% of net compensation (Wages less Employee deferrals). Contributions for the 15% limit include not only employer match and profit sharing contributions, but also employee 401(k) contributions.

Under the new law profit sharing plan contributions will be limited to 25% of gross compensation (Employee deferrals are not subtracted from compensation). Furthermore the 25% limit only applies to employer match and profit sharing contributions.

These two amendments significantly raise the amount that can be contributied by employers to a profit plan. Currently, an employer wanting to maximize contributions must maintain both a money purchase and a profit sharing plan. The new law eliminates the need of maintaining the money purchase plan (at least from a tax deduction standpoint).

How it can benefit HCE's really depends on your document and company demographics. You should check with your current administrator.

Hope this helps

[Guest RBlaine]

Prior to Eggtra

Eligible Compensation = 1,000,000

Total Deferrals = 125,000

Comp for max deductible contribution is 875,000

max contribution (15% of 875,000) = 131,250

therefore only 6,250 more can be contributed for match, ps, etc

Due to Eggtra

Eligible Compensation = 1,000,000

Total Deferrals = 125,000

Comp for max deductible contribution is 1,000,000

max contribution = (25% of 1,000,000) = 250,000

AND 250,000 can be deposited for match, ps, etc

Combine this with the increase salary (I realize that the 1,000,000 would have gone up, but I was trying to be simple) you can use for contributions and the HCE's could get more of the match and PS contributions.

I dont remember the dates that each of these things take effect so there may be a year or two delay in getting the full benefit of the changes.