I need help with the deduction limitations for ESOPS combined with a 4

[Guest lawdawg]

I have heard that C-Corps who have a 401(k) plan and an ESOP are entitled to a deduction limitation of 25%. I thought it was 15%. Can someone explain to me why the limitation is 25%? Is it because an ESOP is a MPP? Also, would the fact that the ESOP is leveraged make any difference?

[RLL]

Hi lawdawg ---

An ESOP under IRC Section 4975(e)(7) must be a stock bonus plan under Section 401(a), but it may also include a money purchase plan. If the ESOP includes a MPP, the deduction limit will be increased from 15% to as much as 25% of covered payroll....depending on the money purchase contribution formula....whether or not there is a 401(k) plan, and the 15% and 25% limits available for ESOP contributions are reduced by 401(k) contributions. This rule applies to ESOPs of both C corporations and S corporations.

In addition, contributions to a C corporation (but not an S corporation) leveraged ESOP are deductible under Section 404(a)(9) in amounts up to 25% of covered payroll to the extent used to pay ESOP loan principal, with contributions used to pay loan interest being deductible outside of the 25% limit. (This special deduction rule for leveraged ESOPs is available even if the ESOP does not include a MPP). The limitation on annual additions under Section 415© may apply to limit the ESOP contributions below the maximum deductible amount.

[stephen]

Can't you use the current stock value for determining 415 limits?

For example, the share value drops from $100 to $50 (possibly due to the large loan the company took to purchase the shares). If a partcipcant is being allocated 20 shares then for 415 purposes you can use 20 x $50 = $1,000 instead of 20 x $100 = $2,000.

[RLL]

stephen ---

Yes....but only if the ESOP plan document so provides.