Deferral of one-time bonus into SIMPLE

[Guest bmurphy]

Company with SIMPLE paid one-time bonus to EE's a few months back. Apparently the executive director deferred a good chunk into his SIMPLE without executing a deferral agreement. Also the rank & file were not informed of their ability to defer any of their bonus. A few questions:

1. Is it permissable to execute a separate SRA to deal with deferral of a one-time bonus?

2. If so wouldn't it have to be done in conjunction with the plan's election periods (in this case calendar quarter)?

3. If done outside the allowable election period does the deferral need to be returned to ER & run back thru payroll?

4. Since the rank & file weren't informed of ability to defer does that fact invalidate the ED's deferral? Or the fact that no SRA was executed?

Any assistance is appreciated. Thank you.

[Appleby]

It is doesn’t pass the smell test…

It appears that under Code Section § 408(p)(2)(A)(ii), the salary deferral election includes amounts received from bonuses. This would mean technically, that the rank and file, who elected to make salary deferral contributions, did elect to defer from their bonuses. The question then becomes, whether the payroll processor did include their bonus in the salary for the month the bonus was received for salary deferral purposes- i.e. if the deferral was a percentage of compensation

I am not sure how a salary deferral contribution would be treated when no deferral election was made…let see if someone else can respond to that issue

[Gary Lesser]

In general, I agree with Appleby's response. The deferral election form could differentiate between regalar and bonus wages for deferral purposes. Assuming it didn't, the bonuses would likely be treated as compensation under IRC 6051 and deferrals made out of such amount.

Since the owner didn't execute a deferral election form, his or her contribution to date are excesses (see below). If the plan permits additional election periods he could join the plan with respect to compensation not yet received.

If the owner is self-employed, the deferral form can be executed any time (e.g., 12/31/05) if in accordance with plan provisions because his/her earned income is treated as earned on 12/31 (although the amount might not be known until a later date). Hope this helps.

[Guest bmurphy]

Sorry for the late reply, was waiting on more info from the employer. Thank you both for the information, it was helpful. The bonus was paid in a separate payroll, however the payroll person did not take SIMPLE deferrals out of anyone's bonus pay other than the Exec Director. Based on your responses, it would appear that the employer needs to rectify this. Does this have to be done retroactive or can they simply go in now & deduct what should have come out from the bonus check? Some EE's elected a percentage deferral & others a flat dollar amount, which shouldn't matter.

The ED did execute a separate "one-time" SRA for the bonus payroll as he wanted to defer a larger amount than he had elected previously. He did this during the month of April which was permissable as the plan allowed for quarterly changes. Assuming that employees were aware of the ability to make changes quarterly, would the employer have any potential liability for not specifically telling people that they could have elected to defer more from their bonus? I would say no but am looking for clarification. Thanks.

[Gary Lesser]

bmurphy,

(1) Did the existing deferral forms that everyone received include the bonus payments in what could be deferred under the plan? It doesn't have to specifically state "bonus." If so, and next item satisfied, a payroll reduction payment seems practical (up to any maximum specified per pay period).

(2) Was the bonus election that was signed by the ED consistant with the 60-day notice? If, not, there may be an overpayment by the ED. In which case, future deferrals could possibly be decreased (to coinside with original election) to make up for this inadvertant error.