How do you calculate deduction limits for a 401(k) and an ESOP?

[Guest lawdawg]

We have a 401(k) and an ESOP. I understand that normally if you have two or more trusts you treat them as one for purposes of the 404 deduction limitations. However, what happens if you have a 401(k)and an ESOP. Are you limited to 15% or can you still utilize the 25% deduction limitation under 404? How does this work?

[Guest RNorris]

My last job was with a TPA who administered several hundred ESOP's, with most clients also having a 401(k).

At a minimum, you are limited to 15% under the 401(k) with an additional 10% for the ESOP. Some make the argument that you can apply the 25% deduction for leveraged ESOP's separately, but I have not personally seen any regs that specifically address this.

[Guest lawdawg]

Do you have a source that states you get a 25% deduction?

[Guest RNorris]

IRC Section 404(a)(9)(A) allows for the 25% deduction. I should clarify, however, that this deduction applies only if the contributions paid to the ESOP are used to reduce the principal on the exempt ESOP loan. Additionally, Section 404(a)(9)(B) provides that there is no limit on the deduction for contributions used to repay interest on an exempt loan.

[stephen]

Note, 25% deduction cannot be used by an S-corp.

[Kirk Maldonado]

Stephen:

Can't an ESOP sponsored by an S Corporation get to the 25% limitation by adding a money purchase pension plan feature (although you can't get there by Section 404(a)(9)).

[stephen]

yes.