Separate Deferral Election on Bonus

[Guest km6719]

We have some conflicting information and was hoping someone might be able to help. We have a plan with a prototype document where the Basic Plan Document language regarding separate deferral election on bonus states "Such an election to defer all or part of a bonus shall be independent of any other salary reduction agreement and shall not constitute a modification to any pre-existing salary reduction agreement".

The plan does not exclude any form of compensation from the definition of compensation. The definition of the plan compensation is total gross compensation.

The document provider states that if a participant makes a separate election for bonus and indicates a "0" than no deferral must be withheld on the bonus amount at all. We believe that the last part of the sentence above in the BPD "......shall not constitute a modification to any pre-existing salary reduction agreement", contradicts that intrepretation. We believe that what ever eligible compensation is for the plan is subjective to the elective deferral. Therefore, by electing "0" on a separate deferral election would mean no additional deferral we be taken on the bonus.

Thanks for any insight!

[J Simmons]

As you've outlined it, I think your document provider is correct. Its interpretation favors the more specific provision addressing bonuses, your interpretation favors the more general provision defining compensation. Usually, the specific trumps the general.

[ERISAnut]

I am not understanding your question, but I will attempt to illustrate by scenario.

The plan allows for salary deferral elections from each regular payroll (i.e. weekly or bi-weekly).

Also, several employees receive one-time bonuses at certain points during the year (subject to different withholding rules, typically at 40%).

A participant elects to have 10% withheld from his regular payroll. This continues to happen. Now comes bonus time. The participant is given a separate election form and the understanding that nothing done on this separate form will impact his election for regular payroll. This separate form will apply ONLY to the bonus amount he is about to receive. He elects to defer 20% of his bonus. This 20%, gets withheld from the bonus check only while the regular payroll continues at 10%. Let's suppose instead that the participant states that he wants nothing withheld from the bonus check. Then 0 is withheld from the bonus, but 10% continues to get withheld from regular payroll.

Anything else isn't worth the effort, because this is how the system is designed to work.

If I have a large bonus coming at want to defer 100% of it, but it happens to occur at the same time as a regular payroll, why should I miss my mortgage payment for having my entire bonus and entire payroll withheld for that pay period. I am interested in deferring 100% of the bonus only (because the IRS is withholding 40% of it anyway). So, it would behoove me to make the maximum deferral from this one-time payment without having it interfere with any other elections I have with other regular payroll streams.

Again, Anything else isn't worth the effort, because this is the advantage employers offer to their employees who receive bonuses. It's supposed to be a good thing, not a controversial thing.

Hope this helps.

Sorry, J Simmons jumped in ahead of my. It took a while to type my response.

[Guest Sieve]

km -- Look at it this way: the plan language that says "shall not constitute a modification to any pre-existing salary reduction agreement" means (as ERISAnut so well described) that it's a one-time election applicable to the bonus only, and will not change the regularr payroll election.

[J Simmons]

Sorry, J Simmons jumped in ahead of my. It took a while to type my response.

Have I been cutting in line again? and it isn't even a queue for a general admission Rolling Stones show!