4.72.15 Internal Revenue Code (IRC) 404 Examination Guidelines

Manual Transmittal

June 11, 2021


(1) This transmits revised IRM 4.72.15, Employee Plans Technical Guidelines, Internal Revenue Code (IRC) 404 Examination Guidelines.

Material Changes

(1) Updated IRM (5) to clarify exclusions of certain employer expenses.

(2) Updated IRM (1) for completeness and clarification.

(3) Updated IRM (7)c) for clarification on establishing or amending a plan.

(4) Updated IRM (3) to add that IRC 404(a)(7) applies when at least one participant benefits under both a DB plan and a DC plan.

(5) Updated IRM (2) to clarify the second note.

(6) Updated IRM (3) to add the language of overlapping coverage and the example was updated.

(7) Updated IRM (2) for completeness and clarification.

(8) Updated IRM (3) a) and IRM (3) b) by adding the sentence “This rule only applies in cases where the employer has not made an election under IRC 4972(c)(7) (see below).”

(9) Updated Exhibit 4.72.15-1, for the compensation limits in 2021.

(10) Updated for editorial and plain language changes throughout.

Effect on Other Documents

This supersedes IRM 4.72.15, dated July 20, 2020.


Tax Exempt and Government Entities
Employee Plans

Effective Date


Eric D. Slack
Director, Employee Plans
Tax Exempt and Government Entities

Program Scope and Objectives

  1. Purpose: This IRM helps Employee Plans (EP) specialists examine an employer’s deductibility of contributions to a qualified pension or profit-sharing plan under IRC 404.

  2. Audience: EP examiners and other specialists

  3. Policy Owner: Director, EP

  4. Program Owner: EP

  5. Program Goal: To ensure continued compliance with the IRC 404 deduction limits.


  1. A plan is qualified if it meets the requirements of IRC 401(a) in form and operation. A qualified plan is entitled to favorable tax treatment.

  2. Contributions an employer makes to a qualified pension or profit-sharing plan are deductible if they are otherwise deductible as ordinary and necessary business expenses, subject to the IRC 404 limits for the amount deductible in any year.

  3. These guidelines address only employer contributions that employers make to qualified pension and profit-sharing plans. They don’t address employer contributions to nonqualified plans or other deferred compensation arrangements, although the deductibility of those amounts is also covered under IRC 404.

  4. Just as these guidelines apply to qualified plans, they address only employer contributions to a trust created or organized in the United States. This IRM doesn’t cover:

    • IRC 404(a)(4) (trusts created or organized outside the United States)

    • IRC 404A (deductibility of employer contributions to certain foreign deferred compensation plans)

  5. This IRM doesn’t address any of the following IRC 404 issues:

    1. Employees' annuities under IRC 404(a)(2)

    2. Simplified Employee Pensions (SEPs) under IRC 404(h)

    3. Dividends paid on certain securities under IRC 404(k)

    4. SIMPLE retirement accounts under IRC 404(m)

  6. Applying IRC 404 rules depends on other Code sections, including but not limited to:

    1. IRC 401 (on the qualification of pension and profit-sharing plans)

    2. IRC 415 (limitation of benefits and contributions under qualified plans)

    3. IRC 412 (minimum funding standards for defined benefit (DB) plans)


    This IRM doesn’t cover these other Code sections except as noted.


  1. The main reference for this IRM section is IRC 404, as amended through the Cooperative and Small Employer Charity Pension Flexibility Act (CSEC) Act, (IRM, Effective Dates.

  2. While this IRM refers to regulations under 26 CFR 1.404(a)-1 through 26 CFR 1.404(k)-3, most haven’t been updated for ERISA and many other statutory changes. Therefore, consider the regulations applicable only if subsequent statutory changes don’t supersede or amend them.

  3. See IRM, Reference Source, for a list of other key reference sources relevant to the material in this IRM.

  4. The primary objective of the Employee Plans examination program is regulatory, with emphasis on continued qualification of employee benefit plans. Plans are examined to determine whether they meet the applicable qualification requirements in operation. Policy Statement 4-119 at IRM

  5. The Director, Employee Plans has authority to enter into and approve a written agreement with any person relating to their tax liability. Delegation Order 8-3 at IRM


  1. Agents determine if plans meet the qualification requirements of IRC 401(a) and IRC 501(a). (IRM and IRM

  2. In June 2014, the IRS adopted the Taxpayer Bill of Rights (TBOR). Agents must consider these rights when carrying out EP examinations. See Policy 1-236 and the Taxpayer Bill of Rights (TBOR).

Definitions and Acronyms

  1. The table lists commonly used acronyms and their definitions.

    Acronym Definition
    CSEC Cooperative and Small Employer Charity Pension Flexibility Act
    DB Defined Benefit Plan
    DC Defined Contribution Plan
    EGTRRA Economic Growth and Tax Relief Reconciliation Act of 2001
    ERISA Employee Retirement Income Security Act of 1974
    GCM General Counsel Memorandum
    IRC Internal Revenue Code of 1986, as amended
    MAP-21 Moving Ahead for Progress in the 21st Century Act (2012)
    PPA ‘06 Pension Protection Act of 2006
    PY Plan year
    TY Taxable year
    WRERA Worker, Retiree, and Employer Recovery Act of 2008

General Rules and Applicability

  1. Contributions an employer makes to a qualified pension or profit-sharing plan are deductible, if they are otherwise deductible under Chapter 1 of the Code, subject, however, to the IRC 404 limits for the amounts deductible in any year.

  2. This IRM’s subsections specific guidance:

    1. IRM, General Conditions and IRM, Employer Contribution - general conditions for deductibility of amounts under IRC 404.

    2. IRM, Timing of Deductions - timing of deductions for amounts under IRC 404.

    3. IRM, Deductions for Defined Benefit Plans - deduction limits for DB plans.

    4. IRM, Deductions for Defined Contribution Plans - deduction limits for DC plans.

    5. IRM, Combined Limitation on Deductions - combined limitation applicable when an employer sponsors both a DB plan and a DC plan.

    6. IRM, Additional Rules and Exceptions - additional rules and exceptions.

    7. IRM, Excise Tax on Nondeductible Contributions - excise tax on nondeductible contributions.

General Conditions

  1. Employer contributions must otherwise be deductible under Chapter 1 of the Code, (IRC 404(a) and 26 CFR 1.404(a)-1(b)).

  2. The plan to which the employer contribution is made must be a qualified plan under IRC 401 in the taxable year in which the contribution is made.


    As noted in IRM (3), although IRC 404 includes rules for deductions to non-qualified plans, this IRM only address contributions’ deductibility to a qualified plan.

  3. To be deductible, the employer must pay the contributions in a taxable year which ends with or within the plan’s trust year for which the trust is exempt under IRC 501(a). For further details on timing of the deduction, (IRM

  4. If an employer’s contributions paid during a taxable year exceed the IRC 404 deduction limits for that year, those excess contributions may be carried over and deducted in a succeeding taxable year per IRC 404(a)(1)(E), (26 CFR 1.404(a)-7).


    The regulation hasn’t been amended yet for P. L. 100-203 changes, which redesignated IRC 404(a)(1)(D) as IRC 404(a)(1)(E).

Employer Contributions

  1. Contributions Actually Paid – A deduction for a contribution to a qualified plan under IRC 404(a) is generally allowable only for the year in which contribution is paid, regardless of the employer’s method of accounting. See Rollar Homes, Inc. v. Commissioner, T.C. Memo. 1987-166.

  2. Certain Payments under ERISA Title IV – Employer payments under these ERISA sections are treated as employer contributions subject to IRC 404:

    • 4041(b)

    • 4062

    • 4063

    • 4064

    • Part 1 of subtitle E of title IV

  3. An entity’s liability payments as a member of a controlled group of corporations are deductible even if that entity doesn’t directly employ the plan participants. See IRC 404(g).

  4. Contributions for benefits under IRC 401(h) – Employer contributions to fund medical benefits in IRC 401(h) must satisfy the general requirements in IRM to be deductible. However, you don’t consider these contributions in applying the deduction limits to employer contributions for retirement benefits; they’re subject to a separate deduction limit, (26 CFR 1.404(a)-3(f)).

  5. Exclusion of Certain Employer Expenses – Employer expenses connected to the plan but not paid by the plan aren’t subject to IRC 404 rules, but are otherwise deductible if they are ordinary and necessary. See 26 CFR 1.404(a)-3(d) and Rev. Rul. 84-146.


    Trustee’s fees and actuary’s fees if paid directly by the plan sponsor and not reimbursed by the plan.

  6. Inclusion of Certain Employer Expenses – Plan sponsor-paid investment fees, brokers' commissions and similar items essential to a trust's asset value are treated as plan contributions subject to the limits of IRC 404, (Rev. Rul. 86-142).

  7. In-Kind Contributions – Scrutinize contributions in a form other than cash and see IRM 4.72.11, Employee Plans Technical Guidance, Prohibited Transactions:

    1. Check the Form 5500 for non-cash contributions.

    2. Verify the fair market value of any property contributed.

    3. Confirm that the deduction claimed for the property plus cash contributions don’t exceed IRC 404 limits.

    4. Determine if the property was contributed to satisfy a funding obligation, such as the minimum required contribution under IRC 412. If so, this is a prohibited transaction. See Commissioner v. Keystone Consolidated Industries, 508 U.S. 152 (1993).

    5. See if any liens were attached to the property contributed. If so, this is a prohibited transaction.

    6. Determine if an employer contributed a promissory note. If so, it isn’t adequate payment for IRC 404 and is a prohibited transaction. See Don E. Williams Co. v. Commissioner, 429 U.S. 569 (1977), as well as Rev. Rul. 80-140.

Timing of Deductions

  1. For a DB plan, the employer takes a deduction for the employer’s taxable year (TY) but the maximum deductible amount is determined with reference to the plan year (PY).

  2. When the TY and PY are the same, the concurrent plan year controls the taxable year deduction.

  3. If the TY and PY aren’t the same, determine per IRC 404(o)(1)(A), the deduction limit under IRC 404(a)(1)(i), (ii) and (iii) using any of the following ways:

    1. The plan year that begins in the taxable year.

    2. The plan year that ends in the taxable year.

    3. A pro-rata share of each year.


      The regulations under 26 CFR 1.404(a)-14(c) haven’t been updated for PPA ‘06.

  4. An employer can’t change its chosen PY/TY linkage in IRM (3) unless IRS approves it as a change in accounting method under IRC 446(e).

  5. Contributions an employer pays by the due date of its tax return (including extensions) are deemed paid on the last day of the preceding TY if those contributions are on account of the preceding TY (IRC 404(a)(6) and Rev. Rul. 76-28). This applies to these Code sections:

    • 404(a)(1)

    • 404(a)(2)

    • 404(a)(3)


      IRC 7508A(d), effective for federally declared disasters after December 20, 2019, provides a mandatory 60-day extension of filing deadlines for taxpayers in federally declared disaster areas. Qualified taxpayers have additional time to make contributions to qualified retirement plans under IRC 404(a)(6).

  6. The deduction must be based on compensation paid or accrued for services actually rendered during the applicable TYs; it can’t include payment for future services. See 26 CFR 1.404(a)-1(b) and Rev. Rul. 2002-46, 2002-29 IRB 118.

    1. For a DC plan, the employer can’t deduct elective contributions or employer matching contributions for a TY, if they are for compensation that plan participants earned after the TY end, (Rev. Rul. 90-105, 1990-52 IRB 6).

    2. For a multiemployer pension plan, contributions paid after the end of the employer’s TY and based on units of service worked after the end of the TY aren’t deductible under IRC 404(a)(6). See Lucky Stores, Inc. v. Commissioner, 107 T.C. 1 (1996).


      See IRM, Compensation, for further guidance on considering compensation for purposes of contributions’ deductibility.

  7. Carryover – An employer can deduct, per IRC 404(a)(1)(E) and 26 CFR 1.404(a)-7, any amount it pays in a TY that exceeds the IRC 404 deductible amount in succeeding TYs in order of time, the difference between:

    1. The amount paid and deductible in each succeeding year, and

    2. The maximum amount deductible for that succeeding year under IRC 404.


    The regulation hasn’t been amended to reflect changes made by Pub. Law 100-203, which redesignated old IRC 404(a)(1)(D) as the new IRC 404(a)(1)(E).

Deductions for Defined Benefit Plans

  1. General – In general, deductions allowed for employer contributions to a DB plan are based on a plan’s actuarial costs. See these IRMs for guidance on the deduction limits for contributions to different types of employer-sponsored DB plans:

    • IRM, Single Employer Plans

    • IRM, Multiemployer Plans

    • IRM, Multiple Employer Plans

  2. Valuation Date Determination – For a DB plan, the deduction limit is determined as of the valuation date for the plan year.

  3. Short Taxable Years – For a plan subject to IRC 430 with a TY less than a full year, the target normal cost reflects actual accruals that accrue or are expected to accrue during the PY. However, the amortization installments are prorated for a short plan year. See 26 CFR 1.430(d)-1(b)(1)(for rules on target normal cost) and 26 CFR 1.430(a)-1(b)(2)(ii) (for rules on the amortization installments). Although these regulations apply to the calculation of the minimum required contribution, the reasoning is the same for deductions under IRC 404(o). GCM 35874 has a helpful analysis of this issue for years before 2006 (and continues to apply for multiemployer plans).


    The GCM is not binding precedent.

Single Employer Plans

  1. General Deduction Limit – For a single employer DB plan, under IRC 404(o)(1), the deduction limit for a taxable year is the greater of:

    1. The amount based on the plan’s funding target. See IRM (2) through IRM (5) below.

    2. The minimum required contribution. See IRM (6) below.

    See these IRMs to determine the amounts in IRM
    • IRM (7) has guidance on definitions and actuarial assumptions.

    • IRM (8) and IRM (9) have guidance on asset adjustments and additional restrictions in determining the deduction limit.

    • IRM (10) shows a sample calculation worksheet.

  2. Deduction Limit Based on Funding Target – For a TY, the general deduction limit for a single employer DB plan equals the excess (if any) of:

    1. The sum of –

      1. The plan's funding target for the plan year;

      2. The plan's target normal cost for the plan year; and

      3. The plan's cushion amount for the plan year, as described in IRM (3) below; over

    2. The value of the plan's assets on the valuation date for the PY, as measured under IRC 430(g)(3). See IRC 430(g)(4) for additional details on the measurement of plan assets for this purpose, see IRC 404(o)(2)(A).

    3. See IRM (4) below for a special floor applicable to a plan that is not in at-risk status for a plan year. See IRM (5) below for a floor applicable to a plan that terminates during the plan year.

  3. Cushion Amount – For the deduction limit based on the funding target –

    1. General Determination of Cushion Amount – The amount for a plan year is the sum of –

      1. 50% of the funding target for the plan year; and

      2. The increase in the funding target that would be determined if the plan took into account increases in compensation expected for succeeding PYs (or, if the plan's benefits aren’t based on compensation, increases in benefits expected for succeeding plan years determined on the basis of the average annual increase in benefits over the six immediately preceding plan years).


      See IRC 404(o)(3)(A).

    2. Limitations on Cushion Amount Determination – To determine the increase under IRM (3)(a)(2), the plan's actuary assumes that the then-current benefit limitation under IRC 415(b) and the then-current compensation limit under IRC 404(l) apply. If the plan is covered under ERISA Section 4021, then the plan's actuary may take into account succeeding PYs expected increases in the IRC 401(a)(17) limits, (IRC 404(o)(3)(B)).

    3. Special Rule for Small Plans – If a plan has 100 or fewer participants for a PY, for the cushion amount, don’t take into account, the plan liability attributable to benefit increases for highly compensated employees (per IRC 414(q)) resulting from any plan amendment which is adopted or becomes effective (whichever is later) within the past two years to determine the target liability upon which the cushion amount is based, (IRC 404(o)(4)).


      Many have interpreted “target liability” to mean "funding target" but there is no formal guidance on this issue.

  4. Special Floor for Plan Not In At-Risk Status – If a plan is not in at-risk status under IRC 430(i) for a PY, then the amount determined for the deduction limit based on the funding target (per IRM (2)) is not less than the excess (if any) of –

    1. The sum of –

      1. The plan's funding target for the plan year, determined as though the rules for at-risk plans under IRC 430(i) applies to the plan; and

      2. The plan's target normal cost for the plan year, similarly determined as though the rules for at-risk plans under IRC 430(i) applies to the plan; over

    2. The value of the plan's assets held by the plan on the valuation date for the plan year, measured under IRC 430(g)(3),(IRC 404(o)(2)(A)(ii)).

  5. Floor for Terminating Plans – If a plan subject to ERISA Section 4041 terminates during the PY, then the amount determined for the deduction limit based on the funding target (per IRM (2)) is not less than the amount required to make the plan sufficient for benefit liabilities under the plan (per ERISA Section 4041(d)), (IRC 404(o)(5)).

  6. Deduction Limit Based on Minimum Required Contribution – For a TY, the general deduction limit for a single employer DB plan is not less than the minimum required contribution under IRC 430 for the plan year ending with or within the taxable year, (IRC 404(o)(1)(B)).

  7. Definitions and Actuarial Assumptions – When determining the deduction limit for a single employer DB plan –

    1. Definitions – Any term used for the minimum funding standards under IRC 430 has the same meaning for the deduction rules under IRC 404, (IRC 404(o)(7)).

    2. Actuarial Assumptions – Any computation for the deduction limit must use the same actuarial assumptions that are used for IRC 430, except that any segment rate stabilization adjustment under IRC 430(h)(2)(C)(iv) isn’t taken into account, (IRC 404(o)(6)). See also IRC 430(h) for rules for actuarial assumptions under IRC 430.


      If the MAP-21 third segment rate is higher than the unadjusted third segment rate, a taxpayer may calculate the maximum deduction limit under IRC 404 using the value of plan assets based on a limit on the expected earnings that reflects the MAP-21 third segment rate and adjusting contributions at the plan’s effective interest rate determined based on the interest rate used to calculate the minimum required contributions under IRC 430. See Notice 2012-61,2012-42 IRB 479, Q&A NA-3(b).

  8. Asset Adjustment – In calculating the deduction limit, exclude any amount that hasn’t been previously deducted from plan assets. Conversely, include any amount that has been deducted for a prior PY in the plan assets, (26 CFR 1.404(a)-14(d)(2)).

  9. Additional Restrictions – See IRM, Combined Limitation on Deductions, for a combined limit on deductions that may apply when an employer sponsors both a DB plan and a DC plan.

  10. Worksheet for Deduction limit for Single Employer Plans – See the worksheet below, which summarizes the rules described in this section. The bracketed alphanumeric designations refer to items within the worksheet itself.

    Worksheet for Deduction Limit for Single Employer Plans
    1. Plan Year __/__/20__ to __/__/20__
    2. Valuation Date __/__/20__
    3. Deduction Limit Based on Funding target  
      (a) Amount Based on Funding Target  
      (1) Funding Target $__________
      (2) Target Normal Cost $__________
      (3) Cushion Amount $__________
      (4) For small plans under IRC 404(o)(4), enter the target liability attributable to recent HCEs amendment(s) $_________
      (5) Amount Based on Funding Target = [3(a)(1)] + [3(a)(2)] + [3(a)(3)] – [3(a)(4)] $_________
      (b) Floor Liability For Plans Not At-risk Under IRC 430(i)  
      (1) For plans not at-risk, enter the Funding Target as if the plan is at-risk $_________
      (2) For plans not at-risk, enter the Target Normal Cost as if the plan is at-risk $_________
      (3) Floor Liability For Plans Not At-risk = [3(b)(1)] + [3(b)(2)] enter zero if the plan is at-risk $_________
      (c) Assets For the Plan Under IRC 430(g)(3) $_________
      (d) Deduction Limit Based On Funding Target = (greater of [3(a)(5)] and [3(b)(3)]), less [3(c)], but not less than zero $_________
    4. Deduction Limit Based On Minimum Required Contribution $_________
    5. Deduction Limit = Greater of [3(d)] and [4]


    The term “target liability” is not defined in the Code nor in any other published guidance.


  11. The above rules for determining the deductibility limit apply to a CSEC plan (per IRC 414(y)). For a CSEC plan, the amount determined under IRC 412(a)(2)(D) for a plan year is treated as the Section 430 minimum required contribution for that plan year, (IRC 404(o)(8)).

Multiemployer Plans

  1. Deduction Limit Determined on an Aggregate Basis – The deduction limit under IRC 404(a) is determined as if all plan participants were employed by a single employer, (IRC 413(b)(7)).

    1. If the anticipated aggregate contributions to the plan for a PY don’t exceed the deduction limit for that PY, then each participating employer’s contributions made during the portion of the employer’s TY that is in the PY are treated as not exceeding the deduction limit. Anticipated employer contributions are determined the same as actual contributions.

    2. If the anticipated aggregate employer contributions for a PY exceed the limit, then the portion of each employer’s contribution which isn’t deductible under IRC 404 is determined per the Treasury regulations.


      These Treasury regulations haven’t been issued yet. If you see this issue, refer the case to the field actuary for further review.

  2. The deduction limit for a taxable year is the greatest of (a), (b) or (c), not exceeding (d):

    1. The minimum required contribution per the funding standards in IRM (4).

    2. An amount designed to provide for level funding over future service in IRM (5).

    3. An amount equal to the plan’s normal cost plus amortization of certain unfunded amounts over 10 years, as discussed in IRM (6) through IRM (9).

    4. The full funding limitation for the PY, as discussed under IRM (10).

  3. The amount determined in IRM (2) above can’t be less than an amount based on the unfunded current liability, as discussed in greater detail under IRM (11).

    1. See IRM (12) for rules on the interaction between the determinations under IRC 404(a)(1) and IRC 412.

    2. See IRM (13) for special rules for certain amendments.

    3. See IRM (14) for interest adjustment for the deduction limit.

  4. Minimum Required Contribution – For a multiemployer DB plan, employer contributions are deductible if the amounts are necessary to satisfy the minimum funding standard per IRC 412. See IRC 404(a)(1)(A)(i). Employer contributions to a multiemployer plan satisfy the minimum funding standard if, in the aggregate, the amounts are sufficient to ensure the plan does not have an accumulated funding deficiency under IRC 431 as of the end of the plan year per IRC 412(a)(2)(C).

  5. Level Funding Over Future Service – For a multiemployer DB plan, employer contributions are deductible if the amounts are necessary to provide the remaining unfunded cost of past and current service credits distributed as a level amount, or as a level percentage of compensation, over the remaining future service of each employee covered by the plan. If the remaining unfunded cost for any three individuals exceeds 50% of the total remaining unfunded cost for the plan, then the plan must distribute the unfunded cost attributable to those individuals over a period of at least five taxable years. See IRC 404(a)(1)(A)(ii). IRC 404(a)(1)(A)(ii) limit applies only to plans that use a spread gain funding method.

  6. Normal Cost Plus 10-Year Amortization – For a multiemployer DB plan, employer contributions are deductible if they equal the plan’s normal cost, plus the amount necessary to amortize the unfunded costs attributable to past service credits or other supplementary credits in equal payments over 10 years. see IRC 404(a)(1)(A)(iii). IRC 404(a)(1)(A)(iii) limit applies only to plans that use an immediate gain funding method.

  7. Establishment of a 10-year amortization base – The following are the rules for establishing 10-year amortization bases, 26 CFR 1.404(a)-14(g):

    1. Experience gains and losses. For a plan using an immediate gain funding method, the plan must establish a 10-year amortization base for each plan year equal to the net experience gain or loss determined for that plan year under IRC 431. A spread gain method must not establish a base for a gain or loss but must rather spread that amount in future normal costs.

    2. Change in actuarial assumptions. If the plan is required to create an amortization base per IRC 431(b), then the plan must establish a 10-year amortization base at the time of a change in actuarial assumptions used to value plan liabilities. The base equals the difference between the accrued liability calculated based on the new assumptions and the accrued liability calculated based on the old assumptions.

    3. Establishment or amendment of plan. If the creation of an amortization base is required under the rules of IRC 431(b), then a 10-year amortization base must be established when a plan is established or amended. The amount of the base is the accrued liability resulting from the plan establishment or amendment, or the decrease in accrued liability resulting from a plan amendment.

    4. Change in funding method. If the plan is required to create an amortization base per IRC 431(b), then it must establish a 10-year base equal to the increase or decrease in unfunded liability resulting from the change in funding method.


    We substituted the references to IRC 412 with IRC 431 in 26 CFR 1.404(a)-14(g), because the regulation hasn’t been updated for PPA ’06.

  8. Maintenance of 10-year amortization base – Each time a plan establishes a 10-year amortization base, the plan must separately maintain the base to determine when the unamortized amount of the base reaches zero. The sum of the unamortized balances of all the 10-year bases must equal the plan's unfunded liability. When the unamortized amount of that base is zero, the plan no longer adjusts its deduction limit for the amortization of that base. See 26 CFR 1.404(a)-14(h). If the total deductible contribution (including carryover contributions) for a PY ≥ the full funding limitation for the year, all 10-year amortization bases the plan maintains are considered fully amortized, and the deduction limit for subsequent PYs won’t be adjusted for the amortization of these bases, (26 CFR 1.404(a)-14(k)).

  9. Combining and offsetting bases – Multiple 10-year amortization bases may be combined into a single 10-year amortization base.

    1. See 26 CFR 1.404(a)-14(i) for the combining and/or offsetting of existing 10-year bases into a single 10-year base.

    2. See 26 CFR 1.404(a)-14(i)(5) for the fresh start alternative. In lieu of combining different 10-year amortization bases, a plan may replace all existing bases with one new 10-year amortization base equal to the plan’s unfunded liability when the new base is being established.

  10. Full funding limitation – The amount deductible for a taxable year under IRC 404(a)(1)(A)(i), IRC 404(a)(1)(A)(ii) and IRC 404(a)(1)(A)(iii) may not exceed the full funding limitation for that year determined under IRC 431. See IRC 404(a)(1)(A) and 26 CFR 1.404(a)-14(k).

  11. Amount Based on Unfunded Current Liability – For a multiemployer DB plan, employer contributions are deductible if the amounts don’t exceed the excess (if any) of:

    1. 140% of the plan’s current liability determined under IRC 431(c)(6)(D), over

    2. The value of the plan’s assets, as determined under IRC 431(c)(2).


      See IRC 404(a)(1)(D)

  12. Correlation with IRC 412 – In general, the computation of the deduction limit under IRC 404(a)(1)(A) is based on the funding method (including valuation data and asset valuation method), actuarial assumptions, and benefit structure used for IRC 431 for the plan year. See IRC 404(a)(1)(A) and 26 CFR 1.404(a)-14(d)(1).

  13. Special Rule in case of Certain Amendments – If an amendment decreases benefits, and the full funding limitation for the year is zero, a deduction is allowed equal to the lesser of:

    1. The full funding limitation under IRC 431(c)(6) plus the unamortized base resulting from the decrease in benefit liability due to the amendment.

    2. The normal cost minus a 10-year amortization of the benefit liability decrease.


      A collectively bargained plan maintained by a regulated utility doing business in at least 40 states may treat a decrease in liability due to increases in Social Security benefits as a plan amendment for purposes of this rule, (IRC 404(a)(1)(B) and IRC 404(a)(1)(C)).

  14. Interest Adjustment – Regardless of the actual time the employer makes contributions to the plan, to compute the deduction limit of IRC 404(a)(1)(A)(ii) and (iii), compute the normal cost and limit adjustments as of the date contributions are assumed to be made (the computation date) and adjust them for interest at the valuation rate from the computation date to the earlier of (i) the end of the plan year; or (ii) the end of the taxable year, (26 CFR 1.404(a)-14(f)(3)).

Multiple Employer Plans

  1. General Rule – For a plan maintained by more than one employer not described in IRC 413(a) (in other words, a "multiple employer plan" ) established after December 31, 1988, generally determine the minimum funding requirement and the deductibility of employer contributions by treating each employer as maintaining a separate plan, (IRC 413(c)(4)(A) and IRC 413(c)(6)(A)).

  2. Election for Older Plans – A multiple employer plan established on or before December 31, 1988, generally must be funded as if all participants in the plan were employed by a single employer. However, under IRC 413(c)(4)(B), the plan administrator of that multiple employer plan may have previously elected to have the rules of IRC 413(c)(4)(A) apply. In this situation, the plan is funded as if each participating employer has a separate plan. See Announcement 90-3; 1990-3 IRB 36. If the plan administrator didn’t make this election, then the rules under IRM (1) apply to the plan, (IRC 413(c)(6)(B)).

  3. Application to CSEC Plans - The rules under IRM (1) apply to a CSEC plan (per IRC 414(y)), (IRC 413(d)(3)).

Deductions for Defined Contribution Plans

  1. General Rule – The deduction limit for contributions to a stock bonus or profit sharing plan is determined under IRC 404(a)(3) as the greater of:

    • 25% of the compensation paid or accrued during the taxable year to the beneficiaries under the plan, or

    • the amount an employer is required to contribute under IRC 401(k)(11), (IRC 404(a)(3)(A)(i)).

  2. All DC plans treated as single plan – If the employer makes contributions to two or more stock bonus or profit sharing trusts, these trusts are considered a single trust to which to apply the limits, (IRC 404(a)(3)(A)(iv)). This applies even if there are no employees who participate in one or more of the plans.

  3. DC Plans Subject to Funding Standards – A DC plan that is subject to the funding standards of IRC 412 (such as a money purchase plan) is treated in the same way as a stock bonus or profit-sharing plan for the IRC 404(a)(3) deduction rules, (IRC 404(a)(3)(A)(v)).

Elective Deferrals Not Taken Into Account

  1. Don’t consider elective deferrals in IRM (2) when applying the IRC 404 deduction limits (IRC 404(n)).

  2. Elective deferrals per IRC 402(g)(3) are employer contributions under:

    1. qualified cash or deferred arrangement in IRC 401(k).

    2. salary reduction arrangement under a SEP, if not includible in gross income in IRC 402(h)(1)(B).

    3. salary reduction agreement under IRC 403(b).

    4. qualified salary reduction arrangement under a SIMPLE retirement account in IRC 408(p)(2)(A)(i).

  3. Elective deferrals aren’t subject to any of the following deduction limitations under IRC 404(n):

    1. IRC 404(a)(3) - contributions to a stock bonus or profit-sharing trust (IRM

    2. IRC 404(a)(7) combined deduction limitation - contributions where the employer sponsors both a DB plan and a DC plan and where there is at least one participant benefiting under both plans, (IRM

    3. IRC 404(h)(1)(C) - contributions to a SEP.

  4. Don’t consider elective deferrals under IRC 404(n), in applying any of the limits in IRC 404(a)(3), IRC 404(a)(7) and IRC 404(h)(1)(C) to any other employer contributions.

  5. See IRM, Compensation, for an explanation of how to treat elective deferrals when determining compensation.

Combined Limitation on Deductions

  1. A combined deduction limit may apply for contributions to DB plans and DC plans with overlapping coverage.

  2. General Rule on Combined Limitation – A combined deduction limit (under IRC 404(a)(7)) may apply if amounts are deductible under IRC 404(a)(1) through IRC 404(a)(4) for:

    1. One or more DB plans and one or more DC plan.

    2. Trusts or plans described in two or more of the above listed Code sections


    As noted in IRM, these guidelines address only plans created or organized within the United States. They don’t address IRC 404(a)(4), which covers certain trusts created or organized outside the U.S.


    If the employer sponsors any plan and claims a deduction under IRC 404(a)(4), then the amount that it can deduct, may be affected by the combined limit.


    The IRC 404(a)(1) and IRC 404(a)(3) limits are determined first by themselves. Then, the amounts allowed as deductions under IRC 401(a)(1) and IRC 404(a)(3) are potentially further subject to the limits of IRC 404(a)(7), (CFR 1.404(a)-3(e)).

  3. The combined limit under IRC 404(a)(7)(A) is the greater of:

    1. 25% of the compensation otherwise paid or accrued during the taxable year to beneficiaries under those plans that have overlapping coverage.

    2. The employer’s contribution to the overlapping DB plan(s) not exceeding the greater of: i) the minimum funding requirements for the plan year, or ii) the excesses (if any) of the plans’ funding targets (as defined under IRC 430(d)(1)) over the values of the respective plans’ assets (determined under IRC 430(g)(3)).


    A company has a single employer DB plan and DC plan with at least one participant in both plans. Total plan compensation is $40 million for a taxable year. For the DB plan, the amount necessary to satisfy IRC 412 for the year is $50 million and the unfunded IRC 430 funding target is $70 million. The employer made $60 million in contributions to the DB plan for the year. The combined limitation on deductions for the year equals $60 million, determined as the greater of: (a) $10 million, (25% of $40 million compensation); and (b) $60 million, (The $60 million DB contributions actually made), not in excess IRC 412 minimum (which is $50 million, but in the case of a single employer plan, for this purpose, the IRC 412 minimum won’t be less than the $70 million unfunded funding target.

  4. Restrictions on DC contributions Taken into Account for Combined Limitation - Use the table below to determine if employer contributions to one or more DC plans are subject to the combined deduction limit:

    If employer contributions to one or more DC plans The combined deduction limit
    Don’t exceed 6% of the compensation otherwise paid or accrued to the beneficiaries under those plans, then Doesn’t apply to:
    1. These contributions

    2. The employer contributions to the DB plans to which the combined limitation would otherwise apply by reason of those contributions to the DC plan.


    See IRC 404(a)(7)(C)(iii)(I).

    Exceed 6% of the compensation otherwise paid or accrued to the beneficiaries under such plans, then Applies, using only those contributions in excess of 6%. This raises the compensation limit to 31% of compensation. See IRC 404(a)(7)(C)(iii)(II)


    This restriction on the DC contributions under IRC 404(a)(7)(C)(iii) reflects WRERA and retroactively applies to the effective date of PPA ‘06. WRERA supersedes Notice 2007-28, 2007-14 IRB 880 Q&A 9, making it inapplicable for all relevant years.

  5. Beneficiary Test – The combined deduction limit shouldn’t reduce amounts otherwise deductible under IRC 404(a)(1) through IRC 404(a)(3) if the employer doesn’t have any employee who’s a beneficiary under more than one trust or under a trust and an annuity plan, (IRC 404(a)(7)(C)(i)).

  6. Elective Deferrals – If the employer doesn’t contribute any contributions other than elective deferrals (as defined in IRC 402(g)(3)) to any DC plan for the taxable year, then the combined limit doesn’t apply. See IRC 404(a)(7)(C)(ii). Also, elective deferrals are not taken into account as employer contributions to apply the combined limit, (IRC 404(n)).

  7. Guaranteed Plans Excluded – Don’t consider single-employer plans covered under ERISA Section 4021 to apply the combined limitation, (IRC 404(a)(7)(C)(iv)).

  8. Multiemployer Plans Excluded – Don’t consider multiemployer plans to apply the combined limit, (IRC 404(a)(7)(C)(v)).

Additional Rules and Exceptions

  1. IRM, Compensation; IRM, Limitations under IRC 415; IRM, Self-Employed Individuals and IRM, Uniform Capitalization Rules, note additional rules and exceptions for IRC 404.


  1. General Rules for Compensation – The term "compensation" includes amounts treated as participant’s compensation under IRC 415(c)(3) subparagraphs (C) or (D), such as elective deferrals in IRC 402(g)(3) for IRC 404(a) paragraphs (3), (7), (8) and (9) and IRC 404(h)(1)(C), (IRC 404(a)(12)).

  2. Taxable Year Different from Plan Year – If the taxable year and plan year are different, calculate the IRC 404(a)(3) deduction limit based on compensation for the employer’s taxable year. Determine the compensation for the deduction limit using the regulatory definition but base the contribution allocation on the plan’s definition of compensation.

  3. Limitation on Amount of Compensation Taken Into Account – When applying any compensation-based limitation on deductions under IRC 404, use an employee’s compensation for any year up to and including $200,000 (adjusted each year for cost-of-living increases under IRC 401(a)(17)(B)). See Exhibit 4.72.15-1 for compensation limits by year and source (IRC 404(l)).

    1. Don’t consider future expected increases in the compensation limitation for DB deduction rules under IRC 404(a)(1)(A), or to compute the full funding limitation before the plan year during which an increase first takes effect.

    2. See IRM and IRC 404(o)(3)(B) for calculations where the expected increase in the compensation limitation may be taken into account.

Limitations under IRC 415

  1. General Rule – When computing a deduction limit, don’t consider:

    • Any DB benefits for the plan year in excess of the IRC 415 limit.

    • Any DC plan employer contributions that are excess annual additions under IRC 415.


      See IRC 404(j)(1).

  2. No Advance Funding of Future Limitation Increases – When computing a DB deduction limit, don’t consider IRC 415 limit cost-of-living adjustments for any year before the year in which an adjustment actually takes effect, (IRC 404(j)(2)).

Self-Employed Individuals

  1. For the IRC 404 deduction rules, the term "employee" includes a self-employed individual per IRC 401(c)(1). That employee’s employer is determined under IRC 401(c)(4), (IRC 404(a)(8)(A)).

  2. A self-employed individual’s plan contributions satisfy the conditions of IRC 162 or IRC 212 if they don’t exceed the individual's earned income (determined before considering the contribution-based deductions allowed by IRC 404 on behalf of the self-employed individual) derived from the trade or business for which that plan is established, and if the contributions aren’t for purchasing life, accident, health, or other insurance, (IRC 404(a)(8)(C)).

  3. Under the rules of IRC 404, a self-employed individual’s compensation is considered to be his earned income derived from the trade or business for which the plan is established, (IRC 404(a)(8)(D)). Also, the earned income is determined considering the deductions allowed by IRC 404, which means the earned income and the amount deducted depend on each other. See IRC 401(c)(2)(A)(v) and the Deduction Worksheet for Self-Employed in Chapter 5 of the IRS Publication 560.


    Individual A, a sole proprietor with no employees, has a profit sharing plan. The plan formula is 25% of compensation. After all adjustments other than the qualified plan deduction, Individual A's self-employment income from the trade or business is $100,000. If Individual A contributes 25% of $100,000, his earned income would be $75,000 ($100,000 - $25,000). However, a deduction of $25,000 is not supported by earned income of $75,000, because 25% of $75,000 is only $18,750. Using an iterative calculation process, the maximum amount that Individual A can deduct is 20% of his self-employment income before the qualified plan deduction ($100,000), or 25% of his earned income after the qualified plan deduction ($80,000). Accordingly, the maximum amount that Individual A can deduct under the plan is $20,000. The 20% comes from dividing the plan allocation rate of 25% by 1 plus the plan allocation rate, or .25/1.25.


    If a self-employed individual sponsors a DB plan, refer the case to the field actuary.

Uniform Capitalization Rules

  1. Employers subject to the uniform capitalization rules or the long-term contract rules may not be able to deduct the full IRC 404 limit. See IRC 263A, IRC 460 and 26 CFR 1.263A-1(e)(3)(ii)(C).

  2. The employer may have to assign a portion of employer contributions representing past service costs to production or inventory costs, which are capitalized and therefore not immediately deductible. See Announcement 88-55; 1988-13 IRB 35.

Excise Tax on Nondeductible Contributions

  1. IRC 4972 imposes an excise tax on employers (other than governmental and certain tax-exempt employers) of 10% of the nondeductible contributions they made to a qualified employer plan, determined as of the close of their taxable year.

    1. A qualified employer plan generally means any plan that meets the requirements of IRC 401(a) that includes a trust exempt from tax under IRC 501(a), any annuity plan described in IRC 403(a), any SEP under IRC 408(k), and any SIMPLE retirement account under IRC 408(p), (IRC 4972(d)(1)).

    2. For a tax-exempt employer to be exempt from the tax, the employer must have at all times been exempt from tax under the Code subtitle A and not have received any tax benefit from the plan. See IRC 4972(d)(1)(B) and IRC 4980(c)(1).

    3. When the nondeductible amount is carried over to subsequent TY, the 10% excise tax applies to any succeeding TY that the carryover isn’t deductible, (Notice 87-37, 1987-22 IRB 22).


      If an employer pays a contribution during the 404(a)(6) period and designates it for the prior TY, and the employer’s total contributions for the prior TY is over the deduction limit, refer the case to the field actuary.

  2. Employers use Form 5330 to pay the IRC 4972 tax.

  3. Exceptions, under IRC 4972(c)(6) and IRC 4972(c)(7) to this excise tax are for contributions to:

    1. One or more DC plans that are nondeductible solely due to the IRC 404(a)(7) limit, but only up to the matching contributions the employer made for the TY, (IRC 4972(c)(6)(A)).First apply the IRC 404(a)(7) combined plan limits to the DB plan contributions. This rule only applies in cases where the employer has not made an election under IRC 4972(c)(7) (see below).

    2. SIMPLE accounts (IRC 408(p)) or SIMPLE plans (IRC 401(k)(11)) solely because the contributions weren’t made in connection with an employer’s trade or business, (IRC 4972(c)(6)(B)). This rule only applies in cases where the employer has not made an election under IRC 4972(c)(7) (see below).

    3. A DB plan, except a multiemployer plan, for which contributions exceed the full funding limitation (as defined in IRC 431(c)(6)). Apply the deduction limits under IRC 404(a)(7) first to DC plan contributions and then to DB plan contributions. The employer must make an election to apply this exception for a taxable year. If an employer does so, then the employer can’t also apply the exception under IRC 4972(c)(6) for the taxable year,(IRC 4972(c)(7)). In other words, an employer who sponsors a single-employer DB plan may elect to not have this tax apply. If you think the employer didn’t make the election to not have this tax apply, contact Mandatory Review and/or TE/GE Area Counsel for further advice.

  4. A special rule for self-employed individuals treats certain excess amounts as allowable deductions under IRC 404 (IRC 4972(c)(4)). The allowable deduction is the excess of the amount the employer must contribute under IRC 412 for the self-employed individual (as defined in IRC 401(c)(1)), over his earned income (per IRC 404(a)(8)) from the trade or business for the plan.

Effective Dates and Reference Sources

  1. IRM, Effective Dates, and IRM, Reference Sources, provide effective dates and a list of reference sources relevant to IRC 404.

Effective Dates

  1. The CSEC Act added IRC 404(o)(8) effective December 31, 2013.

  2. MAP-21 amended IRC 404(o)(6) effective for taxable years beginning after December 31, 2011.

  3. WRERA amended IRC 404(a) effective as if included in the provisions of PPA ‘06 to which the amendments relate.

  4. PPA ‘06 added IRC 404(o) effective for taxable years beginning after December 31, 2007. PPA ‘06 amended IRC 401(a) with various effective dates for different provisions.

  5. EGTRRA amended IRC 404 for taxable years beginning after December 31, 2001.

Reference Sources

  1. See table below for key legal citations and their topic:

    Legal cite Topic
    GCM 35874 Deductibility of a plan’s normal cost for a short taxable year
    Rev. Rul. 76-28 Applying IRC 404(a)(6)
    Rev. Rul. 80-140 Clarifies that the delivery of a taxpayer's own term promissory note to an employees' trust doesn’t constitute payment for IRC 404(a)
    Rev. Rul. 81-114 Requirement that a plan must be in existence as of the last day of the employer's taxable year for which a deductible contribution is made
    Rev. Rul. 84-146 Excluding certain expenses from employer contributions deductible under IRC 404
    Rev. Rul. 86-142 Including certain expenses as employer contributions deductible under IRC 404
    Notice 87-37 IRC 4972 excise tax
    Announcement 88-55 Coordinating the deduction limits with the uniform capitalization rules
    Rev. Rul. 90-105 Applying IRC 404(a)(6) to IRC 401(k) plans and matching contributions
    Announcement 90-3 Election procedures for certain multiple employer plans under IRC 413(c)(4)(B)
    Notice 2007-28 Certain PPA ‘06 changes


    WRERA made guidance in Notice 2007-28 on the IRC 404(a)(7) combined limit retroactively inapplicable

    Notice 2012-61 Special rules on pension funding stabilization for single-employer DB plans under MAP-21


    As of the date of these guidelines, Treasury regulations were not yet amended for EGTRRA, PPA ‘06, WRERA, and MAP-21 changes.

Compensation Limits under IRC 404(l)

Plan Year Compensation Limit Reference
2021 $290,000 IR-2020-244 (10/26/2020)
2020 $285,000 IR-2019-79 (11/06/2019)
2019 $280,000 IR-2018-211 (11/01/2018)
2018 $275,000 IR-2017-177 (10/19/2017)
2017 $270,000 IR-2016-141 (10/27/2016)
2016 $265,000 IR-2015-118 (10/21/2015)
2015 $265,000 IR-2014-99 (10/23/2014)
2014 $260,000 IR-2013-86 (10/31/2013)
2013 $255,000 IR-2012-77 (10/18/2012)
2012 $250,000 IR-2011-103 (10/20/2011)
2011 $245,000 IR-2010-108 (10/28/2010)
2010 $245,000 IR-2009-94 (10/15/2009)
2009 $245,000 IR-2008-118 (10/16/2008)
2008 $230,000 IR-2007-171 (10/18/2007)
2007 $225,000 IR-2006-162 (10/18/2006)
2006 $220,000 IR-2005-120 (10/14/2005)
2005 $210,000 IR-2004-127 (10/20/2004)
2004 $205,000 IR-2003-122 (10/16/2003)
2003 $200,000 IR-2002-111 (10/18/2002)
2002 $200,000 IR 2001-115 (12/11/2001)
See https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions for most recent dollar limitations on benefits and contributions.