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Interpretation of the Model Salary Reduction Agreement


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P.S. - this is a SIMPLE-IRA.

You wouldn't think there is room for any interpretation here, but...

The model salary reduction election provides for a flat dollar amount or a percentage to be withheld "...from my pay for each pay period..."

Suppose you have someone who has elected a flat dollar amount - say $50.00. Once a year, they are paid a bonus, which is paid in a separate paycheck.

Clearly the bonus must be considered when determining total compensation for purposes of calculating the 3% matching contribution and limit. But is (A) withholding $50.00 required, or (B) is it not required since the bonus was paid during a "pay period" when $50.00 was already withheld from "regular" pay?

I'm inclined to think this could reasonably be argued either way. It matters in this situation because the employer botched the SIMPLE for years for a whole bunch of employees, and needs to file a VCP correction. So I can submit using interpretation (B) to see if the IRS approves, and fall back to (A) if they don't, but I don't want to bother with attempting (B) if I know it is a losing proposition. So, I just wondered if anyone has encountered this before, and if so, with what interpretation/results?

Thanks.

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