Compensation definition and deferrals

[Guest phyphy]

An employer allows its employees to defer either a dollar amount or a percentage per payroll. However, for bonuses, the employer wants to allow deferral contributions for participants who choose a percentage but not for those who choosse a flat dollar amount.

The bonus payrolls are in addition to normal payrolls and occur outside the normal payroll period. The definition of compensation is section 3401(a) compensation.

Can the employer justify his actions?

Thanks!

[WDIK]

the employer wants to allow deferral contributions for participants who choose a percentage but not for those who choosse a flat dollar amount.

Is the percentage/dollar amount distinction you refer to based on the employees' regular deferral election, or a separate election on the bonus only?

[Guest phyphy]

It is based on the initial election of the participant. There is no special election form for bonuses or other "non-regular" compensation.

Thanks!

[austin3515]

My input is purely from a practical perspective. Why would they want to add such an arbitrary and ostensibly non-sensical differentiation?

Sounds like a participant communication nightmare. They should be allowed to make special elections with respect to bonuses, period. Why complicate it? Eventually some participant will be pretty upset that they don't have this opportunity because of a technicality.

[WDIK]

First, I assume that we are not talking about a prototype document.

What are the characteristics of the respective groups deferring as percentages versus dollar amounts? Would you be able to show that such a provision does not discriminate in favor of highly compensated employees?

I agree with austin3515. Especially if this is a small employer, it seems impractical.

[g8r]

I agree that it doesn't seem to make sense. But, maybe what's going on is that if someone elects to defer 10% of comp, the bonus is also deferred at 10%. For someone who defers $X, then nothing is taken out of the bonus b/c the election was for a specific amount. In other words, is it just a matter of application of the deferral election or is it an extra deferral procedure that is only available to people who defer a %.

Also, you can always take a dollar amount and convert it to a % of pay. If you elect a % of pay, it would automatically apply to fluctuations (such as raises, tips, etc.). But, if comp doesn't vary much and employees can change elections on a fairly frequent basis, it just doesn't make sense to allow this type of variation.

But, assuming the employer wants to do this, then I would think that it's o.k. as long as it's nondiscriminatory.