What is the maximum deduction limit for employer contributions under IRC 404(a)(3)?

The maximum deduction limit for employer contributions under IRC 404(a)(3) is set at 25% of the total compensation of all employees participating in the plan. This provision allows employers to deduct contributions made to their qualified retirement plans up to this specified percentage, which is designed to provide flexibility for employers in funding their retirement plans while still conforming to tax compliance standards.

This limit is particularly relevant because it ensures that employers can make significant contributions to their 401(k) plans while also receiving a tax benefit. The participation of all employees is considered in this calculation, which emphasizes the importance of equitable contribution strategies across the workforce.

The other options, such as 10% of participant compensation, the same as the 401(k) limit, or a scenario with no limit, do not adhere to the established guidelines outlined in the tax code. Contributions capped at 10% would be too low, and linking the deduction limit to the 401(k) contribution limits does not reflect the provisions set for employer deductions. Lastly, there is indeed a limit imposed by the IRC, so the notion of having no limit is inaccurate. Thus, the answer correctly identifies the 25% of participant compensation as the appropriate maximum deduction limit under the relevant IRC section.