415 Limit - Compensation Definition

[richard]

For the purpose of the 25% of compensation 415 limit, do you define compensation by starting with the employee's pay and subtracting the 401(k) employee deferrals as well as the Section 125 plan deferrals.

For example, an employee earns $100,000. He defers $10,000 into the 401(k) and another $5,000 into the Section 125 plan. Is his 415 limit equal to 25% of $100,000, $95,000, $90,000 or $85,000.

(Please ignore the issue if his pay is above $160,000)

Thanks

[Guest David Dye]

For the 25% limit under Sect. 415, you do not exclude amounts deferred under a salary reduction arrangement. To use your example, you would take 25% of $100,000 for the 415 limit.

The definition of compensation under IRC Sect. 415©(3) was amended by the Small Business Job Protection Act of 1996, effective for Plan Years beginning on or after January 1, 1997.

[richard]

David, that's what I thought. I think the code reference is 415©(3)(D), but I believe it's effective for plan years beginning after 12/31/97.

[Guest David Dye]

You are correct on the effective date of the 415 definition of compensation. It IS effective for plan years beginning after 1997.

I stand corrected.

[This message has been edited by David Dye (edited 05-24-99).]

[Guest JD Colville]

As a slight aside to this question, I had understood that the IRC 404 limit was not changed to correspond to the change in the 415 limit which was amended for plan years beginning after 1997 as you correctly point out. However, in a recent IRS audit, the examiner took the position that the 404 limit for profit sharing plans included the deferrals to 401(k) and to 125 plans for plan years beginning after 1997. I was also surprised to find that the IRS support for its definition of compensation for IRC 404 purposes is a Private Letter Ruling, (PLR) 9225038, which is based on regulations which were last amended in 1961. Has anyone dealt with this issue?

JDC

[Guest bswift]

yahoo, nope see Treas. Reg. Sec. 1.415-2(d)(3)(i).

[Guest yahoo]

For the 25% of the 415 calculation, may you also include deferrals under a nonqualified deferred compensation plan?