retroactive amendment for compensation to 1/1/04

[Guest kelly9522]

Calendar year plan

For the current 2004 plan year, the current definition of compensation is total compensation.

however, earlier in 2004, the employer gave out bonus checks, but did not take deferrals from the bonus checks, and according to the definition of compensation, they should have.

Can the plan sponsor retroactively amend the plan to 1/1/04 to not include bonus in the definition of compensation?

If not, how do they correct the fact that they did not do deferrals off of bonus?

[mbozek]

Why not have the employees remit the bonus amount to the employer to contribute to the plan and reduce the w-2 wages?

[Guest kelly9522]

The employer does not want to have deferrals taken from bonus....and they don't want to match the deferral on the bonus. The match is made per payroll

[E as in ERISA]

Do you have any out, based on deferral election forms?

The plan may say that the word "Compensation" means total compensation -- which means that total amount can be used for calculating profit sharing contributions, deferrals and match.

However the standard deferral election form doesn't form doesn't always use the same definition. The form may just say how much they want taken out of "regular" compensation or earnings -- as opposed to the formal definition of "Compensation." Accordingly, employees could possibly be considered to have only elected to have deferrals taken out of their regular payroll. (You could have a separate election form with respect to bonus amounts.)

Technically, the formal definition of "Compensation" only says "how much"; it doesn't say when its taken out. So you could potentially create a form that allows you to spread the deferral on bonuses out over other payrolls. I'm not saying that is a good way to do it. But its an arguable solution when a mistake has been made.

Do you have anyone who is complaining? If a bonus is announced, most aren't expecting to have any deferrals taken out and would actually be disappointed if their checks would be reduced.

The primary ones who might be concerned are HCEs -- e.g., if they want to maximize contributions but are limited to what percentage they can elect. You could still provide the mechanism for them (and any other employees) to defer their maximum percentage for the year by spreading out their deferral over the remainder of the year.

If you amend the plan then you limit what HCEs can contribute.

[mbozek]

If the employer paid the bonus to the employees without taking out the 401k deferral then the employees have no legal right to the money that should have been deferred. The employee can write a check to the employer for the amount that should have been contributed to the 401k plan and the employer reduces the employee's w-2 income for an equal amt. E.g if employee receives 10,000 bonus and 1000 should have been contributed to the 401k plan the employee can write a check for 1000 to the employer which will be contributed to the 401k plan and the employer will reduce the employee's w-2 comp by 1000.