The employer contribution deduction limit is the maximum deduction for employer contributions to your Gusto 401(k) plan in a single taxable year. In general, this limit is 25% of total compensation for all eligible employees, and any contributions that exceed it are not deductible for tax purposes. The limit applies on an employer-wide basis, covering all contributions made for a single taxable year by the employer, its legally related affiliates, and all other qualified plans maintained by the employer during that year. To help your plan stay within this limit, we do not allow safe harbor nonelective contributions exceeding 25% of compensation, and we strongly encourage that matching formulas are limited to no more than 25% of compensation.
Important: Determining the deduction limit and the results of exceeding it can be complicated. Plan sponsors need to consult with a qualified tax advisor to make sure requirements are met. Sponsors are also responsible for working with their business tax advisor to report employer contributions and handle any applicable excise tax filings.
Any amounts contributed to the plan beyond the employer deduction limit are considered nondeductible contributions. While they are nondeductible, they cannot be removed from the plan. The plan will also get a penalty for nondeductible amounts.
When this happens, the employer needs to:
File Form 5330 to report the amount of the nondeductible contributions
Pay a 10% excise tax on the nondeductible amount
The sponsor should consult with their tax advisor to accurately report the tax deduction and determine the appropriate treatment of the nondeductible contributions. Generally, these amounts may be carried forward and deducted in the next taxable year, as long as the total is within the deduction limit for that year.
It is not permissible to refund or reverse nondeductible employer contributions. Contributions must remain in the plan and stay allocated to participants, as long as they do not exceed the IRS annual additions limit.