Bonus Deferral

[Guest cbp]

I am relatively new to 401(k) plans and had the following question, please excuse my overall lack of knowledge.

A 401(k) plan defines compensation as W-2 wages increased by elective contributions. John Doe employee receives $30k compensation of which $5k is bonus pay. The $5k of bonus is not deferred against. Is this a violation of plan provisions? I am having trouble finding any guidance, thanks in advance for any assistance.

[JanetM]

as bonus is w-2 comp it should have been included in income eligible to defer.

[Guest FormsRmylife]

Unless the plan document provides for separate deferral elections for bonuses either in the document or by plan administrator published rules authorized by the document text. Our volume submitter has this feature in the elective deferral section so that participants can make a separate election for bonuses.

"The plan administrator shall provide a written notice to all participants of the required procedures for making an election and the date as of which an election will be effective.. . . . The participant’s salary reduction election shall apply only to compensation that becomes currently available to the employee after the effective date of the election. The employer shall apply the salary reduction election to all of the participant’s compensation (and to increases in compensation), unless the participant’s salary reduction election specifies that the election is to be limited to certain compensation."

[jquazza]

Which brings you to the correction methods. If the sponsor did not withhold deferrals from bonuses and the plan doesn't exclude bonuses from comp nor does it provide for a separate election, the sponsor will probably have to make a QNEC to make up for the missed deferrals.

[QDROphile]

If a deferral has to be charged to the bonus one way or another (separate election or application of current election) if the bonus is included in the definition of compensation, does the sam principle apply to all forms of income that may be included in a typically broad definition of compensation, including taxable income that is not paid in cash?

Does the limitation on the source of the potential deferral have to be expressed in the plan document?

If you exclude bonus (or another item) as a source of deferral, but include bonus as compensation for purposes of testing or limits, is that still a problem? In other words, can the plan require a participant to change the election on regular pay to effectively defer from the bonus amount?

[RTK]

I don't think there is a problem in excluding bonus compensation from the regular elective deferral election, while including it in testing compensation and limits. I think a plan can require a separate elective deferral election for bonus compensation.

Bottom line, the plan document should have clear terms on what compensation is subjective to elective deferral and what elective deferral elections can be made. It seems like the majority of documents I have seen provide for (one way or another) a separate elective deferral election for bonus compensation (with some being clearer than others).