Deduction ESOP contributions

[Lori Foresz]

It was my understanding that ER contributions to a leveraged ESOP were subject to the same deductibility rules (25% of eligible compensation) but that this amount could be exceeded if the excess amount is required interest payments on a note.

I want to make sure my understanding is correct.

Scenario: ER contributions and corresponding note payments for the year were $350,000. $50,000 is interest and $300k is principal payments on the note. Does eligible partcipant compensation need to be at least $1,200,000 in order for the company to deduct the full $350,000 on their tax return?

If it is not, then do they have a nondeductible contribution subject to excise tax?

Or is it that if schedule note payments are $350k and the ER has to make at least this amount of contributions to prevent the ESOP from defaulting on the note, then it is fully deductible regardless of eligible compensation? Doesn't seem right but just want to make sure.

Thanks

[BeckyMiller]

See IRC Section 404(a)(9). If the special limits of IRC Section 415©(6) are satisfied then the deduction limit does not include any contribution made to pay interest on the ESOP loan. The 25 percent of pay limit can include any employer contributions - 401(k) match, principal payment, cash payments to fund distributions, etc.

[Kirk Maldonado]

Becky:

Aren't you asssuming that the business is a c corporation? It might be an s corporation.

[BeckyMiller]

Thanks Kirk - you are correct. I was thinking in a C corporation world. Happily, the Code Sections that I cited make the differentiation! (But that assumes that folks actually look at those citations.)

As Kirk noted - S corporations do not get the expanded deduction under IRC Section 404(a)(9).

Thanks again - Becky

[Guest justbe]

What about the deductibility of dividends on a terminated ESOP? Is the company eligible for a deduction if the dividends paid on allocated shares are used to pay down the loan on a plan that is terminating? What happens if the dividends are paid out to participants? If the plan is terminating - when do the dividends need to be distributed to insure the deductibility to the company? Distributions may take a while as the plan waits for a favorable determination letter upon termination. Any guidance on these issues would be appreciated.