Employer contributions to a qualified plan are deductible up to certain limits. The contributions, along with any earnings and gains, are generally tax free until distributed.

  1. Deduction limits - The deduction limit depends on the type of qualified plan.
    • Defined contribution plans - Deduction cannot be more than 25% of the employee's compensation.
      • Self-employed - Must reduce this figure to take into account the deduction for one-half of the self-employment tax and the deduction for contributions on the self-employed individual's behalf to the plan. The self-employed individual uses a net earnings figure to calculate the appropriate deduction limit.
    • Defined benefit plans - Deduction is based on actuarial assumptions and computations. An actuary must calculate the deduction limit.
  2. Defined contribution limits - Annual contributions and other additions (excluding earnings) cannot exceed the lesser of the following amounts:
    • 100% of the participant's compensation.
    • $52,000 (for 2014).
    • Excess annual additions - Amounts contributed to a defined contribution plan that exceed contribution limits. A plan can correct excess annual additions caused by the following actions:
      • Reasonable error in estimating participant's compensation.
      • Reasonable error in determining the permitted elective deferrals.
      • Forfeitures allocated to participant's accounts.
    • Correcting excess annual additions - A plan can correct excess annual additions in the following ways:
      • Allocate the excess to other plan participants to the extent of their unused limits.
      • If these limits are exceeded, do one of the following:
        1. Hold the excess in a separate account and allocate to participants in the following year before making any contributions for that year.
        2. Return employee after-tax contributions or elective deferrals.
  3. Defined benefit limits - The maximum contribution is the amount needed to provide an annual benefit no larger than the smaller of $210,000 (for 2014) or 100% of the participant's average compensation for his or her highest three consecutive calendar years.
  4. Annual compensation limit - The maximum compensation that may be considered for qualified plan purposes is $260,000 (2014, indexed for inflation).
  5. Definition of compensation - The IRS defines compensation to include all of the following:
    • Defined contribution plans - Deduction cannot be more than 25% of the employee's compensation.
      • Self-employed - Must reduce this figure to take into account the deduction for one-half of the self-employment tax and the deduction for contributions on the self-employed individual's behalf to the plan. The self-employed individual uses a net earnings figure to calculate the appropriate deduction limit.


Top heavy plans

Related Articles
  1. Retirement

    Why are 401(k) contributions limited?

    Find out why contributions to 401(k) retirement plans are limited, including what the current contribution limits are and how limits encourage participation.
  2. Retirement

    Retirement Planning for the Self-Employed

    How to select a qualified retirement plan if you are self-employed and have no employees.
  3. Retirement

    401(k) Contribution Limits in 2016

    Find out what the contribution limits are for 401(k) retirement savings plans in 2016, including individual, employer and aggregate limits.
  4. Retirement

    What's a Defined Contribution Plan?

    A defined contribution plan is a company retirement plan that specifies the amount of money contributed to it.
  5. Personal Finance

    529 Plan Contribution Limits in 2016

    Learn about the contribution and account balance limits on 529 plan accounts and discover how these contribution limits differ in each state.
  6. Retirement

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  7. Retirement

    It’s Never Too Late to Contribute to Your 401(k)

    Find out why it is never the wrong time to start contributing to a 401(k), even in your late 30s, 40s or 50s; discover how to maximize your savings at any age.
  8. Financial Advisor

    Don't Miss These Tax Deductions

    Knowing the tax deductions you're entitled to can make or break your bank account. Do you know about all these insurance-related deductions?
  9. Financial Advisor

    Are Cash Balance Pensions the Best for Small Biz?

    Are cash balance pensions the right solution for your small business clients? Here's why they may or may not work for your firm.
  10. Financial Advisor

    Tips on Charitable Contributions: Limits and Taxes

    An overview of the limits and tax deductions of charitable donations.
Trading Center