tax exempt employer - 15% deduction limit?

[Guest boetgerinc]

In the September 14, 1998 issue of "Pension & Benefits Week", the following was stated - "Subject to certian pre-1987 carryforwards, the maximum contribution which an employer may deduct is 15% of the aggregate eligible plan year compensation (Code Sec. 404(a)(3). Because of this deduction limit, many plan sponsors wrongly conclude that the maximum contribution which can be made to a profit sharing plan is also 15% of eligible compensation. For tax exempt employers, a profit sharing plan that adheres to the 15% limit may unnecessarily preclude the employer from providing larger contributions during years of greater financial support or unduly restrict elective deferrals from employees where the plan contains a section 401(k) feature. However, the design of a profit sharing plan maintained by a tax exempt entity need not be limited by the Code Sec. 401 limits on deductible contributions."

Am I correct to assume that since a tax exempt employer does not take deductions, that is why they are not subject to the 15% limit - and we only need to worry about 415 limits and 401(g) limits for individual employees?

[Guest BobParks]

You are correct. There was an interesting article on 401k plans for non-profits on the E&Y website and they pointed out the same thing.

[This message has been edited by BobParks (edited 10-04-98).]

[Guest dbc]

Does anyone have any more information on exceeding the 15% deduction limit for nonprofits? I haven't been able to find either of the sources mentioned above. Is the gist that nonprofits go all the way to the 25% 415 limit with a combination of employer contributions and elective deferrals in a profit sharing plan/401k? If so, is this an accepted position or an aggressive one?

[Guest ESOPwizard]

Be careful: If your tax exempt client has UBTI or has a for profit sub covered by the plan,

it could owe an excise tax on nondeductible contributions if it contributes more than 15%.

[richard]

The IRS might have a problem if the non-profit exceeds the 15% limit dramatically; for example by contributing 50% of the payroll.

I had some discussions 10+ years ago with some non-profits about this, and while they were nowhere near this level (they were thinking about contributing say 17-18%), the question did come up.