If a company maintains both a DB and a DC plan, its total deduction is limited to the greater of 25% of payroll or the DB minimum. [401(a)(7)]


If the DC plan is a 401(k) plan (with no company match), does the above limitation apply? If so, do the employee deferrals to the 401(k) plan count against the limit?

Example: Company payroll is $400,000, DB contribution requirement is $80,000 and total 401(k) deferrals are $40,000. 25% of $400,000 is $100,000.

Can the company deduct $120,000 ($80,000 for the DB plus $40,000), since the 401(k) deferrals do not count against the $100,000 limit?

Or is the deduction limited to $100,000 ($60,000 for the DB plus $40,000 for the 401k plan, with $20,000 carried forward to next year), since 401(k) deferrals are counted against the $100,000 limit?

Or, ... something else?


(It would seem unfortunate that a hypothetical company with a pension contribution above 25% of payroll could hurt themselves by starting a deferral-only 401k plan; even if it excludes the owners from participating in the 401k plan.)

The deduction is limited to $100,000. The excess would be deductible in the following year, but would be subject to a 10 percent excise tax under Code Section 4972. Current tax legislation would eliminate this lunacy by excluding 401(k) deferrals from the 404 limits.