Corporate taxes in relation to 401(k) contribution matching

[Guest bwhitaker]

Does a corporation gain a tax advantage by contributing matching funds to employee 401(k)'s as opposed to contributing matching funds to an ESPP? In other words, does a corporation get to reduce its taxable income by the amount they contribute to 401(k)'s, much like an individual would? For that matter, does a corporation get to reduce its taxable income by the amount they contribute to ESPP's? If yes concerning 401(k)'s; Are there limitations to the amount that can be matched?

[jaemmons]

You might want to look at IRC 404©(3), as amended by EGTRRA Section 616. I don't know of any advantage to the corporation for contributing to an ESPP than a 401(k). Without know the details of how the ESPP is structured, one major difference is the possibility of dividend deductibility within the ESPP. However, this does not constitute an "advantage" but an additional deduction for the company (assuming they meet the requirement in EGTRRA Section 662) for deductibility.

[Kirk Maldonado]

jaemmons: An ESPP is not a tax-qualfied retirement plan; it is an employee stock purchase plan under Section 423. Thus, the rules about dividend deductibility do not apply here.

bwhitaker: Off the top of my head, whether the employer contributions are made to the ESPP or to the 401(k) plan shouldn't affect the employer's taxes one way or the other.

However, making matching contributions to an ESPP raises several tax and securities issues. You need to retain counsel to advise you on both of those matters.