25% and 15% calculations wrt ee deferrals

[David]

When calculating the 404(a)(7) limitation (25% limit), are 410(k) employee deferrals considered compensation? In other words, is gross comp reduced by deferrals before applying the 25%? If so, is comp reduced by deferrals before or after applying the $170,000 comp limit?

Also, regarding the 15% max ER PS contribution, is comp reduced by deferrals before or after applyng the $170,000 limit?

[Guest]

always start with comp, then reduce by deferrals (don't forget cafeteria) then cap at 170,000 if necessary.

multiply this result by 15%.

This gives you the total maximum deductible contribution - consisting of deferrals, match, and profit sharing.

[David]

Thanks Tom. Same thing with the 404(a)(7) calc?

[Richard Anderson]

The compensation used for the 25% limit under 404(a)(7) is the same as that used for the 15% deduction limit for non-pension plans. In other words, deduct 401(k) and 125 deferrals, then apply 401(a)(17) limit, as Tom indicated. Treas. Reg. 1.404(a)-13(a) specifically addresses this.

If one of the plans is a DB plan, then the deductible limit is the greater of 25% or the minimum funding standard under 412 for the DB plan.

[pjkoehler]

Regarding the treatment of elective deferrals under Code Sec. 401(k) in computing the deduction limit under Code Sec. 404(a)(7), see Code Sec. 404(a)(11) (compensation is not "paid" until actually received, i.e. elective deferrals are excluded from "compensation"). Regarding the imposition of a limitation on annual compensation in computing the deduction limit under Code Section 404(a)(3)(A)(i), see Code Sec. 404(l), which incorporates the limitation set forth in Code Sec. 401(a)(17) by reference.