Elective Deferrals

[Guest Peter Riggins]

I have a plan administration client whose attorney is advising them that they can pay employee bonuses and then have the individual employees turn around and cut checks to the plan for elective salary deferral purposes. This seems to be a viloation of Tres Reg 1.401(k) - 1(g) (3) which says the deferrals need to be made by the employer (on a payroll deduction basis) based on the employees' elections. Are there any circumstances where having the employees cut personal checks to the plan, or to the employer for deposit into the plan, would be an acceptable practice?

[actuarysmith]

I agree with your conclusion. I don't understand why the attorney would be advising this - what advantage to the employer would result from this convoluted approach?

Further, if the bonuses are run through payroll, all payroll taxes including federal tax withholding would be required to be paid, unless the employer deposits the money directly.

They must do their own payroll - I can't imagine a payroll company would allow this.