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Bill
Bill, Enrolled Agent
Category: Tax
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Experience:  EA, CEBS - 34 years experience providing financial advice
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I understand that in a profit sharing 401 k plan that 1.

Customer Question

I understand that in a profit sharing 401 k plan that 1. contributions up to $46,000 or employee compensation can be made and                                         & nbsp;                                          ;         2. deferrals included in that $46,ooo up to the amount of 15,5oo can be made in 2008                                                                                   &nbs p;         3 that the employers can take a tax deduction of 25% ofm all employer contributions limited to 230,000$                                        &n bsp;                                                         4. what I dont understand is : what are the rules on how much   an employees can deduct when either she makes a voluntary contribution or allows a salary reduction..ie elective deferral..$????                                       & nbsp;                                        ( 5 I understand it will grow tax deferred and be taxed a ca p     gains rate upon distribution)      Can you help wm with pont #4
Submitted: 5 years ago.
Category: Tax
Expert:  Bill replied 5 years ago.
Assuming that I understand your question #4 correctly, "How much can an employee deduct via an elective deferral?" - An employee can defer the lessor of 100% of his/her compensation or $15,500 ($20,500 if age 50 or older). The amount that an employee defers will be reduced from the amount that is reported as gross wages/compensation on the employee's W-2 for federal income tax purposes.
Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3077
Experience: EA, CEBS - 34 years experience providing financial advice
Bill and other Tax Specialists are ready to help you
Customer: replied 5 years ago.
So the maximun amount the an employee will deduction with respect to his/her 401k will be $15,500.this year .Is this correct based based on you r wonderful clear response? thanks PAM
Expert:  Bill replied 5 years ago.
The maximum amount that an employee can have deducted from his/her pay this year as a pre-tax (401(k)) elective deferral is $15,500 ($20,500 if age 50 or older). If the employee also has voluntary (after-tax) contributions deducted then the total limit is $46,000 (the section 415 limit) even though the pre-tax contributions are still limited to $15,500. However, voluntary contributions may only be made if the plan permits them and they are typically limited to 6 - 10% of compensation.
Customer: replied 5 years ago.
Does it seem unfair to you that a corporation is allowed to deduct from income taxes up to 25% of the total compensation (limited to 46,000per employee) where as an employee is only allowed to reduce his/her W2 by $15,000????
Does this not discriminate in favor of the corporation in any given tax year? Please have the amount paid for the response increased to $45
thanks PAM
Expert:  Bill replied 5 years ago.

In my opinion it is not necessarily unfair since an employee may be able to receive a deduction (depending on the level of compensation) that is even a greater percentage than the 25% available for businesses. For example, if an employee earns $50,000 and contributes $15,500 via 401(k) deferrals then that employee is receiving a reduction of 31% ($15,500/$50,000) from his/her federal income tax earnings. In addition, only a small percentage of workers defer the maximum dollar amount of $15,500 and these are usually highly compensated employees.

In my opinion this deduction limit does not usually discriminate in favor of corporations as they rarely contribute the maximum permissible. For example, if a corporation has 200 employees with a total payroll of $10,000,000 and the employees make 401(k) deferrals totalling $500,000 and receive a match of $400,000 then the total contributions to the plan are $900,000 or 9% of compensation. The corporation would have to make a additional discretionary profit sharing contribution $1,600,000 (very unlikely in today's economy) to reach the maximum deduction of 25% of total compensation.

Expert:  Bill replied 5 years ago.

HiCustomer

I made a correction in my example in the second paragraph of my previous response in order to reflect that the 25% limit does not include elective deferrals. The deductible amount is 25% plus the elective deferrals made by employees. See below:

"In my opinion this deduction limit does not usually discriminate in favor of corporations as they rarely contribute the maximum permissible. For example, if a corporation has 200 employees with a total payroll of $10,000,000 and the employees make 401(k) deferrals totalling $500,000 and receive a match of $400,000 then the total contributions to the plan are $900,000 and only $400,000 (4% -- $400,000/$10,000,000) is applied towards the 25% deductible limit as elective deferrals are not included in the limit. The corporation would have to make an additional discretionary profit sharing contribution of $2,100,000 or 21% (very unlikely in today's economy) to reach the maximum deduction of 25% of total compensation."

Customer: replied 5 years ago.
ok..pam

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