This subsection, which was significantly modified
by recent pension reform legislation (EGTRRA), prescribes the overall
limits on deductible contributions to defined contribution plans
such as 401(k) plans. (When reviewing this IRC section, it is important
to note that 401(k) plans are a form of profit sharing plan.) The
pension reform changes to this subsection, which become effective
January 1, 2002, are fundamental to the creation of the new Individual(k)
plan.
IRC Sec. 404(a)(3)(A) Before Pension Reform
(A) Limits on deductible contributions
(i) In general
In the taxable year when paid, if the contributions are paid into
a stock bonus or profit-sharing trust, and if such taxable year
ends within or with a taxable year of the trust with respect to
which the trust is exempt under section 501(a), in an amount not
in excess of the greater of -
(I) 15 percent of the compensation otherwise
paid or accrued during the taxable year to the beneficiaries
under the stock bonus or profit-sharing plan, or
(II) the amount such employer is required
to contribute to such trust under section 401(k)(11) for such
year.
(ii) Carryover of excess contributions
Any amount paid into the trust in any taxable year in excess of
the limitation of clause (i) (or the corresponding provision of
prior law) shall be deductible in the succeeding taxable years
in order of time, but the amount so deductible under this clause
in any 1 such succeeding taxable year together with the amount
allowable under clause (i) shall not exceed the amount described
in subclause (I) or (II) of clause (i), whichever is greater,
with respect to such taxable year.
(iii) Certain retirement plans excluded
For purposes of this subparagraph, the term ''stock bonus or profit-sharing
trust'' shall not include any trust designed to provide benefits
upon retirement and covering a period of years, if under the plan
the amounts to be contributed by the employer can be determined
actuarially as provided in paragraph (1).
(iv) 2 or more trusts treated as 1 trust
If the contributions are made to 2 or more stock bonus or profit-sharing
trusts, such trusts shall be considered a single trust for purposes
of applying the limitations in this subparagraph.
(v) Pre-87 limitation carryforwards
(I) In general
The limitation of clause (i) for any taxable year shall be increased
by the unused pre-87 limitation carryforwards (but not to an
amount in excess of 25 percent of the compensation described
in clause (i)).
(II) Unused pre-87 limitation carryforwards
For purposes of subclause (I), the term ''unused pre-87 limitation
carryforwards'' means the amount by which the limitation of
the first sentence of this subparagraph (as in effect on the
day before the date of the enactment of the Tax Reform Act of
1986) for any taxable year beginning before January 1, 1987,
exceeded the amount paid to the trust for such taxable year
(to the extent such excess was not taken into account in prior
taxable years).
