CONTRIBUTION AND ALLOCATION LIMITATIONS FOR PLAN YEARS ENDING IN 2024
Date: April 2024
C CORPORATION CONTRIBUTION LIMITATIONS (Sec. 404 of the Code):
Example: (The Sec. 404 limit is calculated for all employer plans in the aggregate.)
|
Sec. 404
|
|
| Gross Compensation 1 |
$345,000.00
|
| Less Sec. 401(k) Salary Reduction |
0.00
|
| Less Sec. 125 Salary Reduction |
0.00
|
| Net Compensation |
$345,000.00
|
| x 25% (or 50% if the ESOP is leveraged)2 |
x 25%
|
| Maximum Total Contribution to All Plans 3 |
$86,250.00
|
| Less Sec. 401(k) Salary Reduction |
0.00
|
| Less Employer Matching Contribution |
( 2,000.00)
|
| Less Employer Discretionary Contribution |
( 2,000.00)
|
| Maximum ESOP Contribution (Sec. 404) |
$82,250.00
|
- It should be noted that compensation in excess of $345,000 per individual is excluded for purposes of Sec. 404, but
not for purposes of Sec. 415. - In the case of C corporation, company contributions are limited to 25% of eligible payroll, provided that the ESOP is not leveraged. If the ESOP is leveraged, (i) the company may make contributions of up to 25% of eligible payroll to the extent that contributions are not used to make principal or interest payments on an ESOP loan, and may make contributions of up to an additional 25% of eligible payroll to the extent that such contributions are used to make principal payments on an ESOP loan or prior to the time for filing the company’s tax return, including extensions, and (ii) the company may make additional contribution to the extent that contributions are used to make interest payments on an ESOP loan (provided that not more than one-third of the contributions are allocated to highly compensated employees.)
- Note, however, that the maximum contribution is in effect limited to the maximum Annual Additions limit under Sec. 415, since Sec. 414(j) states the contributions that cannot be allocated due to Sec. 415 limits cannot be deducted.
S CORPORATION CONTRIBUTION LIMITATIONS (Sec. 404 of the Code):
Example: (The Sec. 404 limit is calculated for all employer plans in the aggregate.)
|
Sec. 404
|
|
| Gross Compensation | $345,000.00 |
| Less Sec. 401(k) Salary Reduction | 0.00 |
| Less Sec. 125 Salary Reduction | 0.00 |
| Net Compensation | $345,000.00 |
| x 25% | x 25% |
| Maximum Total Contribution to All Plans | $86,250.00 |
| Less Interest Expense | ($20,000.00) |
| Less Sec. 401(k) Salary Reduction | 0.00 |
| Less Employer Matching Contribution | ( 2,000.00) |
| Less Employer Discretionary Contribution | ( 2,000.00) |
| Maximum ESOP Contribution (Sec. 404) | $ 62,250.00 |
COMPENSATION FOR ALLOCATION PURPOSES:
Unless your plan document provides otherwise, employee salary reductions under Sec. 401(k) Plans and under Sec. 125 cafeteria plans do not reduce gross compensation for ESOP allocation purposes. Thus, unless your plan specifically provides otherwise, contributions to your ESOP will be allocated among participants in proportion to gross compensation.
ANNUAL ADDITIONS LIMITATION (Sec. 415 of the Code):
Under Sec. 415 of the Code, the total Annual Additions (employer contributions, employee contributions and reallocated forfeitures) that may be allocated to a participant’s account for any given year may not exceed the lesser of $69,000 or 100 percent of the participant’s compensation. For purposes of Sec. 415, employee salary reductions under a Sec. 401(k) Plan and employee salary reductions under a Sec. 125 cafeteria plan do not reduce gross compensation. On the other hand, employee salary reductions, employer matching contributions, discretionary employer contributions, participant forfeitures, and ESOP contributions all count against the Sec. 415 limitations.
Example: (The Sec. 415 limit is calculated for each individual participant.)
|
Sec. 415
|
|
| Gross Compensation | $345,000.00 |
| Less 401(k) Salary Reduction | 0.00 |
| Less 125 Salary Reduction | 0.00 |
| Net Compensation | $345,000.00 |
| x 25% / 100% | x100% |
| Maximum Annual Additions | $345,000.00 |
| Maximum Annual Additions (EGTRRA: Lesser of $49,000 or 100% of Gross Compensation) | $ 69,000 |
| Annual Additions: | |
| Employee Sec. 401(k) Salary Reductions | $ 10,000.00 |
| Employer Sec. 401(k) Matching Contribution | 2,000.00 |
| Employer Sec. 401(k) Discretionary Contribution | 2,000.00 |
| Sec. 401(k) Forfeitures | 1,000.00 |
| ESOP Forfeitures | 0.00 |
| Total Annual Additions | $ 15,000.00 |
| Maximum Allowable ESOP Allocation | $ 69,000.00 |
| Maximum Allowable ESOP Contribution (Lesser of Sec. 404 or Sec. 415) |
$ 69,000.00 |
- It should be noted that compensation in excess of $345,000 per individual is excluded for purposes of Sec. 404, but not for purposes of Sec. 415.
- Note that forfeitures of shares purchased in a leveraged transaction do not count as an Annual Addition if not more than one-third of the employer contributions are allocated to highly compensated employees.
- Although Section 404 of the Code would allow a deductible ESOP contribution of $82,250 in the case of a C-corporation and $62,250 in the case of an S corporation, Section 415 of the Code limits the actual deductible amount to $69,000.00
Phil DeDominicis is an ESOP strategist and M&A advisor who has guided 300+ companies through ESOP formations, financing, and transactions over 20+ years at Menke & Associates. He specializes in selling ESOP‑owned businesses to financial or strategic buyers and in helping ESOP companies acquire other businesses.
