ESOP401(K)Annual Addition limits.

[Guest Babs]

How does a 401(k) plan interelate to an ESOP???? How are the 415 limits on the "Annual Additions" computed? How does a 401(k) plan affect those limits when the employee is also a participant in a company ESOP???? What contribution "counts first" towards the 415 limitation??

[Tom Poje]

more important, what type of ESOP?

If it is a leveraged ESOP, there are special rules to consider. (It is possible that only principal paid on the leveraged shares counts towards 415 limit) It is possible that the document(s) will indicate which plan returns excess 415 limit.

[Guest Tom Geer Daily Access Concepts]

How the 415 limits apply is a matter, primarily, of plan documentation. The two plans should have language in them on the subject, and with luck they will be consistent.

Applying the limits to the non-k plan in any set of plans including a k plan raises potential problems. If, say, the money stays in th k plan and the ESOP allocation is reduced, the k participants just lose their contributions and match. If that is happening, somebody ought to tell them. If the limits are applied to the k plan, you will be refunding mor k contributions and forfeiting related matches, but at least they get their money back.

No matter whihc plan you limit, the ESOP rules for detemining the amoun subject to 415 apply (principal only, payments only, exclude releases based on dividends applied to ESOP loan).

This is a very complex area, and I would be glad to help off-line if you wish. tom_geer@dailyaccess.com.

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[Guest mwilson]

Babs - Section 415 limits the total allocations an individual may receive from defined contribution plans in a "limitation" year (usually the calendar year if your company is a calendar year taxpayer). Accordingly, if an individual is a participant in two DC plans (e.g., an ESOP and a 401(k) Plan), the total allocations to him under both plans may not exceed the 415 limitations.

Moreover, if such a participant receives allocations from both plans during a limitation year which exceed the 415 limits, his allocations must be reduced to the extent necessary to satisfy Section 415. To determine which allocations are reduced (from the ESOP or from the 401(k) Plan or from both), you should look to the terms of the plan documents.

Check out Section 415©(6) and the regulatioNs thereto for rules with repsect to the determination of ESOP allocations which are "annual additions" for purposes of Section 415.