IRC 415(c) limit

[Guest koo]

I am confused as to the IRC limit for defined contribution plans. According to IRC 415©(1), the limit is the lesser of 1) 40,000 (indexed for inflation) or 2) 100% of participant's annual compensation. However, with respect to 2), the IRS website states the limit is 25% of participant's annual compensation. I am considering a money purchase plan and want to know if the limit is 25% or 100% of annual compensation. Can anyone refer me to the code?

http://www.irs.gov/irm/part4/irm_04-072-007.html

http://www.irs.gov/retirement/article/0,,id=108949,00.html

[Mike Preston]

They are two different limitations. The 100% limitation applies to allocations to a participant's account. Allocations can include contributions and forfeitures. The 25% limitation applies to the tax deduction available. In the case of a one person plan, the lower of the two control. You would need multiple participants to be able to push any one participant's contribution north of the 25% barrier. Of course, that would only be possible if the plan allowed for disparate treatment of participants so that there were one or more participants receiving less than 25%.

[BG5150]

From the first link:

Amendments to IRC 415© under EGTRRA provide that, effective for limitation years beginning after December 31, 2001, the DC dollar limitation is $40,000, and the DC compensation limitation is 100% of the participant's compensation.

It doesn't take into account, however, the 25% of compensation deduction limit that Mike references above. So, in a small plan, a combination of all three limits may come into play.

[SheilaD]

From the first link:

Amendments to IRC 415© under EGTRRA provide that, effective for limitation years beginning after December 31, 2001, the DC dollar limitation is $40,000, and the DC compensation limitation is 100% of the participant's compensation.

It doesn't take into account, however, the 25% of compensation deduction limit that Mike references above. So, in a small plan, a combination of all three limits may come into play.

You might consider a 401(k) plan. Salary deferrals do NOT count towards the 25% limit but do count towards the $ 40,000 limit. Also, if over age 50, catch up contributions do not count towards either limit. Also keep in mind that if you are self-employed the calculation gets a bit more complicated.