415 limits

[Tom Poje]

a leveraged ESOP had an amazing $19.90 left on a loan from the prior year.

That was paid off in the current year.

since less than 1/3 of that loan pmt went to the HCEs, then forfeitures (of shares) don't count against the 415 limit?

(This year they also made a large cash contribution in order to pay distributions. This resulted in a big chunk of forfeitures as well, so people are bumping into the 45,000 limit.)

In future years since there are no loan pmts, does that rule no longer work since there really is no '1/3 of loan pmt' left???

[stephen]

Tom,

Yes. In future years since there are no loan payments the 1/3 rule does not apply since there are no payments being made.

The information below may assist you with your 415 issues.

Stephen

Allocation Limits (IRC §415©)

1. Plan years beginning after December 31, 2001, the limit on annual additions is the lesser of 100% of gross compensation or $40,000 (indexed).

2. Annual additions consist of contributions and forfeitures (under EGTRRA, elective deferrals to a 401(k) plan are still included as annual additions).

3. All plans of the employer must be aggregated.

4. In C Corporation ESOPs, if no more than one-third of the employer contributions applied to principal and interest payments on an exempt loan are allocated to the highly compensated employees, the 415 limit shall not apply to either forfeitures of employer securities acquired with the proceeds of the loan or employer contributions applied to interest payments on such loan.

Example:

C Corporation with 401(k) plan providing match equal to 100% up to 6% of the deferral and ESOP contribution of 25% of eligible compensation.

Participant age 45 earning $100,000 in 2005

Deferral $14,000

Match $6,000

ESOP Lev Stock Forfeiture $1,000

ESOP Contribution $25,000 including $8,333.33 interest

Total Annual Addition $46,000

This fails 415.

If the plan passes the 1/3 test, you do not have to include interest or forfeitures of leveraged stock.

Deferral $14,000.00

Match $6,000.00

ESOP Lev Stock Forfeiture $0.00 exclude leverage stock forfeiture

ESOP Contribution $16,666.67 excluding $8,333.33 interest

Total Annual Addition $36,666.67

This allows the participant to pass 415.

5. If the plan allows, current fair market value of stock allocated from the loan suspense account rather than actual contribution dollars used to release such stock may be used to determine the annual addition.

What if plan fails 1/3 test? Or ESOP is not leveraged? You may be able to use the current fair market value approach for 415.

Example:

C-Corporation with 401(k) plan providing match equal to 100% up to 6% of the deferral and ESOP contribution of 25% of eligible compensation.

Participant age 45 earning $100,000 in 2005

Deferral $14,000

Match $6,000

ESOP Lev Stock Forfeiture $1,000

ESOP Contribution $25,000 release 200 shares at $100.00/sh.

Total Annual Addition $46,000

This fails 415.

If the plan document allows you may use the fair market value approach.

Deferral $14,000

Match $6,000

ESOP Lev Stock Forfeiture $1,000

ESOP Contribution $20,000 ( = 200 x $100)

Total Annual Addition $41,000

This allows the participant to pass 415.

6. To reduce any excess annual additions, the plan document may allow for deferrals to be returned to the participants, reduce the participant’s share of the ESOP contribution and reallocate to other participants, or allocate the excess amount to a suspense account to be allocated in the next plan year.

7. No deduction is allowed with respect to any contribution amounts that result in excess annual additions.