404(a) Deduction in Single Employer Plan

[Dougsbpc]

A Partnership sponsors a 401(k) plan. There are 3 physicians who are partners and they have about 10 employees who are also participants.

There is a new physician who is also now a partner, except rather than him, his partnership interest is owned by his S-Corporation. His S-Corporation is now a participating employer in the plan.

The 404(a) deduction for employer contributions to the plan is 25% of the compensation of all eligible participants.

Question:  Is the S-corporation subject to its own 404(a) deduction limit of 25% of its employees? In other words, suppose the new physician is the only S-corporation employee and he has W-2 salary of $100,000. Is his deduction limited to $100,000 X 25% = $25,000 or is his $100,000 salary added with all other participants of the plan and that total is subject to the 25% limit?

Thanks.

[Dougsbpc]

I found the answer in "Who's the Employer"

[Mike Preston]

11 hours ago, Dougsbpc said:

I found the answer in "Who's the Employer"

And it was?

[Dougsbpc]

The answer was that if you have a controlled group, you aggregate all compensation for all employees of all entities. However, if you do not have a CG but have an ASG then only the compensation for each entity is considered for deduction purposes. An exception to this is if your plan was established before 1989 and the employer did not elect under IRC 413(c)(4)(B) to have IRC 412 funding requirements computed separately. Then there is a single 404(a) limit that is shared between all the group members.

In this case we lucked out because the plan we were working on was established before 1989 and no IRC 413(c)(4)(B) election was made.