Retirement Plan Tax Deductions/Credits for Tax-Exempt Sponsors

“Do the deductibility rules for employer contributions to a retirement plan under Internal Revenue Code (IRC) Section 404 apply to 403(b) plans? And does it matter whether the contribution is nonelective or matching?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

No. The rules under IRC Section 404 provide a tax deduction for retirement plan sponsors for employer contributions made to a retirement plan that otherwise qualify as ordinary and necessary business expenses. For defined contribution (DC) plans, deductions for contributions are generally limited to 25% of the compensation paid to beneficiaries of the plan during the taxable year. However, the organizations eligible to sponsor a 403(b) plan, such as 501(c)(3) charitable organizations, are tax-exempt organizations and do not pay Federal income taxes. Thus, there are no taxes from which to take a deduction, rendering IRC Section 404 moot for purposes of tax-exempt organizations, regardless of the type of employer contribution.

The same logic applies to tax credits for start-up retirement plans, which were recently expanded under the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Though for-profit corporations and other tax-paying entities can take advantage of such a credit, tax-exempt entities of the type that sponsor 403(b) plans cannot, since they do not pay the type of taxes from which a credit could be taken.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.