404 deduction limits

[imchipbrown]

I have a client who is coming up against the 404(a)(3) limits on deductible contributions to his 401(k) Plan. The "problem" is the NHCs really like the Plan, and all want to defer 15% of pay or more.

As I understand it, "compensation" is net of 401(k) deferrals.

In addition, though you are "benefiting" under the Plan for 410(b)if you are eligible to defer, 404(a)(3) requires you to be a beneficiary under the Plan to include your comp in the 15% calculation.

Stop me if I'm wrong anywhere so far.

We have one new employee who's eligible to defer, but doesn't want to.

The Plan is to have her agree to defer $1.00. This would allow us to consider her compensation for 404. It doesn't foul up the ADP test too much.

I guess the question I have is, next year, she'll still be a beneficiary of $1.01, so I would think, even if he/she makes no more deferrals, I can include the compensation in the 404 calculation.

As for the excise tax on non-deductible contributions, assuming 415 limits are OK, if you make the deferrals required by an employee's election and the match required by the terms of the Plan, does anyone think they might the excess over the 404 limits could be deductible under 162? Just a thought...

[Dave Baker]

Heck, I don't think an employee who is eligible under the terms of the plan to contribute to the plan has to actually contribute anything before his or her comp gets included in the 404 compensation calculation. That's my read on what it takes to be a "beneficiary" under the 404 rule. He or she "benefits" under the plan by being able to contribute, whether or not actual salary deferral contributions are made. Seems consistent with the "benefiting" concept under the 410(B) minimum coverage rule.

[Guest Diane McKoy]

I asked the 404 question at the Advanced Pension Conference sponsored by Corbel in Chicago 9/99. The experts all agreed that if the employee is eligible to defer, their compensation is included in calc of the deduction limit. One attorney said that the "knee jerk" reaction of an IRS agent would be to disallow but upon further consideration, the compensation would be included. In my case, the eligibility for the 401(k) portion of the plan is 3 months. It is 2 years for the profit sharing portion. My client is getting the benefit of the 3 month compensation for their 404 calc.