Wants to defer out of bonus only

[Guest dubya]

A small company is thinking about adding a 401k feature to their profit sharing plan. For himself personally (but the option would be available to all), the owner would like to use the k feature as an end of year activity rather than a regular monthly transaction, and inquired about whether or not her could defer $0 out of all regular paychecks, and then defer up to $16,000 (over age 50) out of his bonus, which is more than large enough to handle a maximum 401k contribution.

Does anyone see a problem with this? Is the obvious answer - that being he elects not to defer all year long, then elects to start deferrals just in time for the bonus, and then ceases deferrals again for the next 12 months, a little too impractical to keep in place?

Thanks

[Guest Bob K]

Our document has a Cash Bonus Option which is used specifically to accomplish what you describe. So yes, it is possible

Hope this helps

[four01kman]

As I recall, the original revenue rulings allowing the deferral of employee dollars were based on the receipt or deferral of profit sharing contributions and/or bonuses. Of course, this was before the change in the law that added Code Section 401(k).

[Guest zdarskyj]

Yes as long as the document allows for the ability to defer bonuses at a different rate than regular elective deferrals.

[E as in ERISA]

I think that the issues more often are with the administration of it. E.g., the payroll system isn't generally set up to work this way -- so it either gets missed....or the deferral percentages get applied to all bonuses and others weren't expecting it. Or one year the bonus doesn't get paid until after year end. So no contribution is made for the entire year. Etc.

[Guest dubya]

I think the mechanics involved (eg, payroll), can be handled properly, considering the small size of the company. It would be a concern ensuring that the bonus and subsequent deferral of that bonus, takes place before EOY. But, if that is satisfied, it seems that this could work. Thanks for all opinions.

[RCK]

You will of course offer this feature to all participants.

[Kirk Maldonado]

I agree with Katherine. I've probably seen the issue about deferrals not being withheld form bonuses come up more often than any other issue.

In one case, the amount of deferrals that weren't withheld was very substantial because it involved a situation where very sustantial bonuses ($10,000 to $100,000) were paid to over 500 employees shortly after the beginning of the calendar year, yet no deferrals were withheld from any of the bonuses, in contravention of the plan document.

[Guest dubya]

RCK - Deferring out of bonuses will be offered to all, but, whoever heard of non-owners getting bonuses???

[Guest hpaine]

What does the document say about the definition of compensation i.e. wages earned upon hire or wages earned from eligibility date/plan effective date? I've had a couple of clients who deferred $12,000 (2002 PY) and received most of it back because of ADP/ACP testing. The plan was only in effect for 1 month (December) and within our plan doc. it reads that comp. in the intial plan year is used from the effective date of the plan, NOT total annual wages thus, the $40,000 limit was pro-rated to just $3,333.33 for that one month. Might be a good idea to check what compensation is used for testing.

[chris]

As to the ADP/ACP issue in hpaine's post, adopt a safe harbor 401(k) and do away with the ADP/ACP testing.

[Kirk Maldonado]

dubya:

If you have never seen non-owners get bonuses, your client base is pretty limited. I've had a client that gave bonuses to more than 500 employees at one time.

[GBurns]

Isn't this where the whole CODA thing started, with the choice of deferring a bonus ( a christmas bonus, if I remember correctly) to a pension plan or taking the cash?

[Lame Duck]

The first 401(k) plan I ever drafted dealt strictly with the deferral of bonuses. It never even considered the possibility of deferring from salary.