Elective Deferral on a Bonus that is later Clawed Back.

[HCE]

I posted this in the "401(k)" forum, but I think it is relevant here, too.

A participant made an elective deferral election of 25% of his bonus.  The bonus was $4,000, so $1,000 was deferred under the 401(k).

However, the bonus was subject to the participant remaining employed with our company for at least one year.  The participant has chosen to leave the company after 6 months, and is required to pay back $2,000 of the bonus.

How does this affect the $1,000 deferred under the 401(k)?  Since half the bonus was forfeited, does that mean we have to remove half the deferral that was based on the bonus before forfeiture?  In other words, do we kick $500 out of the plan?

*Please note:  The numbers are made up, so to the extent some de minimis rule applies to the figures above, it is probably not applicable in this situation.

Some other facts:

• The Bonus was paid this year and is being clawed back this year.
• The Bonus is going to be paid back directly by the employee (we aren't reducing any compensation payments). 
• On the participant's 2022 tax statement, it will be reported that she earned a $2,000 bonus (not the full $4,000, half of which was clawed back).

I appreciate any help!

[Bird]

I don't see the other post, and in general there is no need to post in different forums - everyone, or most everyone, just gets a feed of new activity, I think.

Anyway, I see no reason for the plan to do anything. Money was deferred; the fact that some of the bonus was clawed back is not relevant to the plan.

[HCE]

30 minutes ago, Bird said:

I don't see the other post, and in general there is no need to post in different forums - everyone, or most everyone, just gets a feed of new activity, I think.

Anyway, I see no reason for the plan to do anything. Money was deferred; the fact that some of the bonus was clawed back is not relevant to the plan.

 

Thank you -- I've gotten similar answers elsewhere, but I'm uneasy about it.  If, at the end of the year, the bonus is not fully reported as wages, how can we treat it as compensation under the Plan?  Won't it raise a red flag that the percentage of compensation deferred doesn't match the compensation reported for the year?

Would it not be similar to a situation where an employee was supposed to receive $2,000/month, but the plan accidentally treated her as receiving $4,000/month and made elective deferrals on the wrong compensation?

[Luke Bailey]

HCE, I really don't know if there is any guidance directly on this, but I think the key thing is it was not an error, but a clawback. At the time the amount was deferred from the bonus, the employee had a "claim of right" to the bonus. As others have pointed out in the other post, I think, if the bonus and clawback are in 2022, you can probably treat the deferral as an error in the deferral amount. But if in different years, no, because you can't even amend the individual's W-2 for a prior year.

[Bird]

On 8/22/2022 at 2:09 PM, HCE said:

Won't it raise a red flag that the percentage of compensation deferred doesn't match the compensation reported for the year?

It was right at the time it was made so you just have to explain it.