Plan Sponsor Quick Tips: Employer Deductibility

Each Monday 401kBasics posts a new tip as a part of our series “Plan Sponsor Quick Tips”. This series is designed to assist plan sponsors in filling their fiduciary role and running their retirement plan efficiently. Your feedback or suggestions on future articles is welcome.

As September 15th approaches, plan sponsors may be approaching a tax-filing deadline. In regards to 401(k) plans, those with minimum funding requirements are expected to make their deposits before the extended tax deadline. Employer deductions for defined contribution plans are limited to 25 percent of participants’ eligible compensation. Contributions required by employers in excess of the deduction limit may still be allocated to the participant’s account, but may not be deducted by the employer on their company tax return in the current year. There are a few factors to consider, including:

  • Deferrals are included in compensation when determining 25 percent of compensation amount.
  • Only eligible employees’ compensation and contributions are part of the deduction limit.
  • Any group of employees excluded from participating on the plan does not have their compensation included in 25 percent calculation

As a plan administrator, it is your duty to make sure that all required employer contributions are deposited into the plan by the due date of the plan sponsors’ tax return. This is the only way a qualified plan can take advantage of a tax deduction. If you are still not sure what to do, make sure you contact your service provider for a thorough explanation!

This site is for entertainment purposes only. 401kBasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.

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