Deferrals and W-2 Comp

[rlb64]

Plans definition of compensation is W-2 pay.

How does an employer withhold deferrals from noncash taxable income? For example, employer may give out gift cards as opposed to bonuses.

[QDROphile]

A couple of options:

1. As an adminstrative matter the plan will apply the election only against a defined limited portion of the compensation, such as amounts that would otherwise run through a paycheck in the regular pay system. This may not be possible if you have a restrictive and rigid plan document. Intelligent plan documents are vastly underrated.

2. The elected amount reduces other contemporaneous cash compensation. This can be very difficult to catch because the payroll system is often unaware of the other compensation. Even with knowledge, the individual sporadic adjustments to the regular deductions may be too difficult. Also, if the extraordinary compensation is significant, the paycheck can be decimated just in time for the rent or mortgage payment, sort of like a negative bonus.

Under both approaches, the procedures should be described in the summary plan description and in the election form. When participants eelct, they should understand what the election means so they can plan accordingly.