• Shannon

Plan Sponsors, How much can you deduct?

Updated: Mar 22, 2019

One of the main tax advantages of sponsoring a retirement plan is the ability to deduct plan contributions.  Because of the significant tax savings created by these deductions, the rules regulating plans limit the amount plan sponsors can actually deduct.  Defined contribution plans, such as profit sharing plans and 401(k) plans, are limited to a maximum deductible contribution of 25% of compensation paid to eligible plan participants.

When determining the deduction…

The limit is an overall plan limit, rather than an individual participant limit.All defined contribution plans of the company sponsoring the plan are combined and measured against the 25% limit.Compensation is defined as all compensation paid to participants, which may be different than the definition of compensation used for allocation purposes.The maximum compensation that can be taken into account in 2018 is $275,000, $270,000 for 2017.Contributions must be deposited by the due date (including extensions) for filing the plan sponsor’s federal tax return in order to be deductible.

Owner-Only 401(k) 

A 401(k) plan can be a significant savings tool for a one-person business entity.  However, because the 415 limit* caps certain contribution allocations to $55,000 in 2018 ($61,000 with catch-ups. In 2017 the limit was $54,000 before catch-ups), small business owners with significant income will bump into the 415 limit, which will determine the deduction amount rather than the 25% limit.

  • Example:  Joe is 51 and owns XYZ Co.  His 2017 compensation is $270,000, and he defers $18,000 into his individual 401(k). Because 25% of his pay is $67,500, the 415 limit applies.  Joe can contribute and deduct a $42,000 profit sharing contribution, for a total deductible contribution of $60,000 – the 2017 415 limit with catch-ups.

Enjoy a free printable form here: How Much Can I Deduct?

*The 415 limit refers to section 415 of the Internal Revenue Code.

Information provided by www.NIPA.org

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