The employer can usually deduct, subject to certain limitations, contributions made to a qualified plan, including those made for their own retirement. The contributions (and the attributable earnings and gains) are generally not taxed to the employee until distributed by the plan. The deduction limit for contributions to a qualified plan depends on the type of plan.

The deduction for contributions to a defined contribution plan cannot exceed 25 percent of the covered compensation paid or accrued during the year to eligible employees participating in the plan. The maximum compensation that can be taken into account when calculating plan funding for each employee is the covered compensation limit, $285,000 for 2020.