ESOP and 401(k)-and excluded family member

[Lori Foresz]

ESOP currently excludes 1042 seller (and family member) because of stock sale. Company also has 401(k) and exluded EES are eligible to make 401(k) contributions but there are no other ER contributions to 401(k) plan.

Are we allowed to consider the "ESOP excluded EES" compensation in the 25% contribution limit (all will be contributed to the ESOP) since they are eligible for the 401(k) plan (combined plan limit) or must we disregard since they are only benefitting under the 401(k)?

Would this be solved by making $10 employer match to 401(k) plan?

many thanks for any help!!

[BeckyMiller]

Hmmm... The regulations at 1.404(a)-9(b) are really old for purposes of this question. There are two PLRs that give some insight into the language of the regulation - see PLRs 9635045 and 199909060. But, I think in today's world, where employee salary deferrals are no longer treated as employer contributions for the deduction rules, your concern is justified. Are you really calculating the limit for two plans, when under your facts, really only one plan is limited. I personnally would not feel comfortable relying on the conclusions that you can combine the limits when making a truly tiny employer contribution to the 401(k) plan. If it is a big deal, I would check with legal counsel or an experienced tax accountant who will really look things up and give your client something that they can rely on.

[Lori Foresz]

Thanks Becky. I will read the PLRs to see if they shed any new light.

What did you mean by "are you really combining the plan limits when only one plan is limited". Is this referring to the fact that the 401(k) plan has no ER contribution so shouldn't be combined for determining the overall limit for both plans? I'm just not sure I understood that.

Many thanks

Lori