Combined Limits under IRC Section 404(a)(7)


This Issue Snapshot discusses the rules relating to the combined limitation on deductions under IRC Section 404(a)(7). This Issue Snapshot does not discuss the rules relating to any IRC Section 4972 excise taxes that might be applicable on non-deductible contributions.

IRC Section and Treas. Regulation

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources)


General Background:

IRC Section 404(a) provides that contributions paid by an employer to a qualified plan are deductible under the rules of IRC Section 404, but only if they would otherwise be deductible. Section 162 allows a deduction for ordinary and necessary expenses during the taxable year in carrying on the trade or business and are compensation for personal services actually rendered. Therefore, contributions to a qualified plan are deductible as provided in IRC Section 404 if they are ordinary and necessary business expenses.

IRC Section 404(a)(3) provides that an employer sponsoring a DC plan is allowed a deduction for contributions of up to 25% of the compensation paid or accrued to beneficiaries of the plan during the employer's taxable year. If the contributions are made to two or more DC plans, those plans are considered a single plan for purposes of applying the 25% limit.

IRC Sections 404(o) and 404(a)(1)(A) provide the maximum deductible limits for DB plan contributions.

Notice 2007-28 provides guidance on certain amendments to the IRC Section 404 deduction limits made by the Pension Protection Act of 2006 (PPA '06). PPA '06 modified the combined limit for deductions to DB plans and DC plans with overlapping coverage under IRC Section 404(a)(7). Changes to IRC Section 404(a)(7) were made by PPA '06, effective for taxable years of an employer beginning after December 31, 2005.

IRC Section 404(a)(7) Combined Limit Calculation:

The IRC Sections 404(a)(1) and 404(a)(3) limits are determined separately first. Then, the amounts allowed as deductions are subject to the further limits of IRC Section 404(a)(7). Treas. Reg. Sections 1.404(a)-3(e), 1.404(a)-13(c).

The IRC Section 404(a)(7) combined deduction limit for a taxable year on contributions to a single-employer DB plan and a single-employer DC plan that have overlapping coverage is the greater of:

  • 25% of the compensation otherwise paid or accrued during the taxable year to the beneficiaries defined under the plans. IRC Section 404(a)(7)(A)(i), or
  • The greater of the minimum required contribution (determined under IRC Section 430) with respect to the DB plan for the applicable plan year or the excess of the funding target (defined under IRC Section 430(d)(1)) over the plan's assets (determined under IRC Section 430(g)(3)) for that plan year. IRC Section 404(a)(7)(A)(ii).

Applicability of IRC Section 404(a)(7):

The combined IRC Section 404(a)(7) limitation only applies for a tax year when:

  • At least one participant benefits under both plans and receives allocations other than elective deferrals in the DC plan. IRC Section 404(a)(7)(C)(i), IRC Section 404(n).
  • The DB plan is exempt from Pension Benefit Guaranty Corp. (PBGC) coverage (IRC 404(a)(7)(C)(iv)), such as:
    • DB plans of professional service employers which never covered more than 25 active participants. ERISA Title IV Sections 4021(b)(13), 4021(c)(2)
    • DB plans covering only "substantial" owners. ERISA Title IV Sections 4021(b)(9), 4021(d).
  • Both plans are single-employer plans. Contributions to a multiemployer plan are not considered when applying the overall limit under IRC Section 404(a)(7). IRC Section 404(a)(7)(C)(v).

If a DB plan and a DC plan have overlapping coverage and employer contributions to the DC plan (other than elective deferrals defined under IRC Section 402(g)) do not exceed 6% of the aggregate compensation of DC plan beneficiaries, the IRC Section 404(a)(7) combined limit does not apply.  (IRC Section 404(a)(7)(C)(iii)).

If there is overlapping coverage and the employer contributions to the DC plan (other than elective deferrals) do exceed 6% of aggregate compensation of the DC plan beneficiaries, then the combined plan limits of IRC Section 404(a)(7) are applied by only considering those DC contributions in excess of 6%.

Limitations under IRC Section 415:

IRC Section 404(j)(1) provides that when computing the amount of any allowable deduction, the following are not considered:

  • Any defined benefit plan benefits for the plan year in excess of the IRC Section 415 limit.
  • Any defined contribution plan contributions that are excess annual additions under IRC Section 415.