Signing Bonus / Section 415 Compensation

[Gruegen]

Under the "currently includible" definition of compensation (aka, "Safe Harbor 415 Compensation"), compensation includes all wages, salaries, fees and other amounts received by the employee for personal services rendered in the course of employment with the employer, but only to the extent includible in gross income. See Treas. Reg. §1.415©-2(b)(1).

Do you think "signing bonuses" would be included in this definition of compensation? In other words, are "signing bonuses" for personal services rendered?

[Mike Preston]

Unless the signing bonus is specifically for the transfer of property, I can't imagine it not being included.

[buckaroo]

I think this is an interesting question. I am unfamiliar with a signing bonus. That being said, I am going to ask a few questions/comments that may seem silly, but I am hoping for clarification.

1 Wouldn't it matter how it was paid and what type of entity? For example, what if the person was the hired as an owner of an S-Corp and the bonus was paid via the K-1? My understanding is that the W-2 is the only compensation available for retirement plan purposes for the S-Corp.

2 What if the signing bonus was paid on a 1099R? I think this is far fetched, but couldn't this happen? If so, would it be included in the compensation defined in the original post? I always thought it was not, but wanted calrification.

3 What if the plan in question is a calendar plan year and the new employee is engaged by the employer to work on 12/1/2007. But his true DOH is 2/1/2008? Does he get the bonus in 2007? If so, I would think that he would not be eligible for the plan until his actual DOH. Correct?

4 My recollection is that if he does not work actual hours, then it would not be included in compensation. (i.e. payment after the end of the year for services redered for the prior year.) How does that affect a signing bonus?

One more interesting point. Is the ptp eligible for the plan immediately or is there some sort of wait? IF there is, it may be includable in 415 comp, but included for other purposes because the doc may allow for comp while a participant. (I think this is related to #3 above, but wanted to throw it out there.)

Any clarification would be greatly appreciated.

[Guest Sieve]

To respond to the original 2 questions:

• The signing bonus would, under normal circusmtances, be compensation; and
  
• Signing bonuses ought to be considered paid for services rendered, as long as the compensation for the period is considered "reasonable" compensation.
  

That being said, Buckaroo has some interesting points to make--or issues to raise (although I think the spirit of the question was that the signing bonus would be W-2 compensation for a common law employe). For example:

• If the signing bonus was paid in a year in which no services were performed at all, then you could argue that the payment does not meet the definition of compensation for purposes of Section 415, and therefore any deferral or employer contribution would exceed Section 415 limitations. (But, see my below discussion in the final bullet point re: payments of a signing bonus in lieu of a salary.)
  
• If the signing bonus were paid in a year in which services are performed, it will be compensation, since the issue of "reasonable compensation" generally is only raised by the IRS in the case of owners, or deemed owners, in order to turn deductible payments of compensation into non-deductible payments of dividends. I don't think the IRS will challenge that issue in a non-owner situation.
  
• If a signing bonus paid to an employee was reported on a 1099, it might still be considered compensation if Section 415 compensation is the Plan's definition, because that definition is not keyed to the W-2 and means all compensation paid for services rendered, even if the compensation is mistakenly, inappropriately, or illegally (?) reported on a 1099.
  
• The definition of compensation will be unrelated to the eligibility date of entry into the Plan. However, the beginning of the initial computation period for eligibility purposes begins on the first day that an employee performs an hour of service--and, remember, an hour of service is awarded for periods when an employee is paid or entitled to payment for performing servcies or for not performing services. If the payment of a "signing bonus" is really an advance on salary prior to the actual commencement of employment--for example, payment to a law school graduate to cover a period of time to study for and take the bar exam--you could argue that the first hour of service for which this person was entitled to payment was when the individual was "hired" (which date was immediately followed by a paid leave period) and not when the first "hour worked" occurs. Likewise for a person who is paid but immediately goes on a pre-arranged vacation before actually commencing work. And, that would be a good argument for claiming that the period of time on paid leave was, in fact, payment for services rendered, and therefore ought to be compensation even if paid in one year while the first day actually on the job falls in another year.