BONUS CHECK: DEFERRALS NOT TAKEN OUT

[Lori H]

a plan whose document defines comp as w-2 wages, allows participants to defer from 2% to 17%. there are no comp adjustments except the period of the plan they were not a participant. there is a special deferral election with respect to bonuses that participants may make. a part. may elect to defer up to 17% of pay. a 2006 bonus was issued. no deferrals were taken out. would it be ok to allow the participants to go back and elect NOT to defer from this bonus? would this be ok, even if the part. deferred let's say 10% during the normal pay periods? basically, i feel the plan sponsor should go back, give the part. the option to defer any amount they wish from the bonus and adjust their bonus checks accordingly. any thoughts?

[stephen]

Have the bonus checks been cashed or deposited? If yes, I am not sure how you can undo what has already been done.

[Guest mjb]

If there was a legally binding deferral election in effect before the bonus was paid, the bonus payment can be returned to the employer for contribution to the plan on the grounds that the employee has no legally enforceable right to the money and the amount should be removed from W-2 comp. See Rev. Rul 79-311 where IRS permitted advance on commissions returned to the employer after payment was made to employee to be excluded from taxable income because the employee had no right to the advance. Note: return must be made in same tax yr as the payment. Employer needs to consut with a tax advisor before accepting the payment.