Exclude bonuses from plan's definition of compensation

[waid10]

Hi. We have an elective deferral only plan (no employer contributions). We have been investigating the possibility of changing the plan's definition of compensation to exclude certain types of compensation. Specifically, we want to exclude bonuses from compensation so that no elective deferrals come out of bonus payments.

My research has been inconclusive on this. Some of the information I have found suggests that this type of exclusion could violate the requirements of effective opportunity under the universal availability rule. This is based on the notion that such an exclusion could impact a participant's ability to make a full deferral up to the 402(g) limit. Other information I have read suggests that the above position is simply conservative and that such an exclusion does not violate the rule.

Does anyone have any thoughts on this? Have you researched this?

Thanks for any thoughts.

[ETA Consulting LLC]

403(b) plans have their own definition of "Includable Compensation". Unlike qualified plans, there is no concept of 414(s) allowing you to use any non-discriminatory definition of Compensation. So, I would not think that (for deferral purposes) you could exclude these amounts from Compensation. However, if the employer choses to make an Employer Contribution (i.e. Nonelective), then the rules of 401(a) apply where you could use any definition of Compensation that satisfies (if applicable) the non-discrimination requirements.

Good Luck!

[Tom Poje]

Certainly no expert on 403b plans, but does your document even allow such a choice?

[ETA Consulting LLC]

Certainly no expert on 403b plans, but does your document even allow such a choice?

Don't be surprised if it does. I've seen some very unfortunate language in documents (i.e. accrual requirements on Safe Harbor 401(k) Contributions) in my days. Hopefully, it will become a more reasonable approach to "follow the document" when the IRS develops their review of 403(b) documents. Not saying that following the document is not currently a reasonable approach, but you are still required to "follow the Regulations" when the terms of your document are inconsistent with regulatory requirements.

Good Luck!

[BG5150]

Not to be nosy, but can I ask why you are thinking of doing this? Is it an administrative issue?

[waid10]

Tom Poje - The current document doesn't allow this, but that doesn't necessarily mean that it isn't permissible under the Regs. Diversified (our TPA and document provider) admits that the document is the conservative approach. They will amend the document if our ERISA counsel directs them to do so.

BG5150 - the reason is more of catering to our employees' desires. Our employees repeatedly have asked that deferrals not come out of bonuses. They simply want the cash. So we, as an organization, want to at least see if it is permissible by law to make this type of change.

[BG5150]

BG5150 - the reason is more of catering to our employees' desires. Our employees repeatedly have asked that deferrals not come out of bonuses. They simply want the cash. So we, as an organization, want to at least see if it is permissible by law to make this type of change.

Is there a way to amend the plan to have withholding from a bonus check optional?

Or even an administrative procedure? I take the stance, that if participants can stop and start back up at any time (per administrative procedure), that people can ask for deferrals not be taken from bonuses. the way i see it, the participant is "stopping" for one paycheck and "restarting" right away after that.

This way, if someone wants some taken from the bonus check they can, while those who don't want it, don't have to.

best of both worlds.

[KJohnson]

At the 2010 ASPAA conference the IRS said that using a 414(s) definition for 403(b) deferrals should be pemissible. Documents do provide bonuses as a permissible exclusion-- such as Metlife

[waid10]

BG5150 - the reason is more of catering to our employees' desires. Our employees repeatedly have asked that deferrals not come out of bonuses. They simply want the cash. So we, as an organization, want to at least see if it is permissible by law to make this type of change.

Is there a way to amend the plan to have withholding from a bonus check optional?

Or even an administrative procedure? I take the stance, that if participants can stop and start back up at any time (per administrative procedure), that people can ask for deferrals not be taken from bonuses. the way i see it, the participant is "stopping" for one paycheck and "restarting" right away after that.

This way, if someone wants some taken from the bonus check they can, while those who don't want it, don't have to.

best of both worlds.

Well, our plan does allow for a separate bonus-only elective deferral percentage. So participants can elect a different deferral percentage on bonus payments than they elect for regular wage payments. But our payroll system isn't structured in a way to make this work. So we don't allow this option. So we either continue to take deferrals out of bonuses at the same rate as out of wages; or if permissible, amend the plan to not take any deferrals out of bonuses.

[waid10]

At the 2010 ASPAA conference the IRS said that using a 414(s) definition for 403(b) deferrals should be pemissible. Documents do provide bonuses as a permissible exclusion-- such as Metlife

I have actually seen the MetLife document that you are referencing. That is what led me to believe that this was possibly okay under the law.

[ETA Consulting LLC]

At the 2010 ASPAA conference the IRS said that using a 414(s) definition for 403(b) deferrals should be pemissible. Documents do provide bonuses as a permissible exclusion-- such as Metlife

I have actually seen the MetLife document that you are referencing. That is what led me to believe that this was possibly okay under the law.

Which is why the IRS needs to hurry up with their opinion letter program for 403(b) Plans. Also, if a person from the podium is going to take a position, it would help if that position is referenced in the Regulations. We hear comments all the time about 'how the IRS gets it wrong during audit by attempting to take positions against things that are clearly supported in the regulations'. Right or wrong, all of these instances will have common ground; the "written" Regulations will serve as the frame of reference for which all arguments are made.

Good Luck!