Calculating the Deductibility of Contributions for Plans with Dual Eligibility Provisions (Posted April 8, 2003) Technical Tip 94: The following question and answer were from the IRS Q&A Session at the 2001 ASPPA Annual Conference: If you have immediate entry on the 401(k) feature of a profit sharing plan and a one-year and semi-annual entry on PS feature, what is your 404 limit? Are there two 404 limits? Response: There is only one 404 limit and all eligible participants’ compensations will be included. Comment: Under Code § 404(a)(3), profit sharing plans may deduct up to 25% of the compensation paid during the taxable year to the "beneficiaries" under the plan. (This percentage was increased from 15% for plan years beginning after December 31, 2001.) The term "beneficiaries" refers to employees who participate in the allocation of the employer's contribution to the plan. (Treas. Reg. § 1.404(a)-9(b)(1); Rev. Rul. 65-295.) The guidance issued does not indicate whether 401(k) contributions qualify as an allocation of the employer's contribution for this purpose. However, The IRS' response to this question expresses the position that participants who are eligible to make 401(k) contributions are "beneficiaries" under the plan. As a result, their compensation should be included in the 404 limit. View all Tips © 2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.