Effect of 401(k) Deferrals on 404 15% Limit

[chris]

Do e/ee deferrals under 401(k) count against e/er's deduction limit of 15% of compensation??

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[Lynn Campbell]

YES. When computing the 15% limit you must subtract the Employee Deferrals from compensation.

[chris]

So, if total compensation is 1,000,000, and of the 1,000,000, 20,000 consists of employee deferrals, the employer's deduction limit is 15% of 980,000, i.e., 147,000??

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[Kathy]

Yes - and since $20,000 of the maximum deductible contribution is already used up by the deferrals, the employer may only contribute an additional $127,000.

[Guest cascigm]

correct me if I am wrong, but didn't SPJA change the definition of 415 comp for plans years beg with 1998. The definition of comp. is can now be true gross comp, no more backing of off salary deferrals and/or 125.

[Dan]

You are correct that SBJPA did change 415 compensation. However it did not change 404© definition of compensation.

[Guest William Lehman]

I have a similar situation and was wondering what the correction is? I know you file the 5330 and pay the penalty for each year, but do you need to withdraw the non-deductible contribution amount?

[Tom Poje]

and a reminder...first subtract deferral, then limit comp...

e.g. if ee makes 200,000 and defers 10000 you still have 160000 to play with.

(200,000 - 10000) not cap at 160,000 then subtract 10000.