disallowing deferrals on bonus payments

[Guest Dash02]

My client maintains a cross-tested plan with a 401k feature (no match). There is very low participation in the 401k feature (approx. 12 participants deferring out of 100+ participants). The client recently informed me that deferrals have not been taken out of bonus payments since 401k was added to the plan several years ago. The administrator or accounting firm has asked that the plan be amended to provide that deferrals not be made with respect to bonus payments. Note that most bonus payments are made to HCEs but that some are made to NHCEs.

Is there anything which would prohibit adding such a provision?

Your input and help is appreciated.

[Jim Chad]

Excluding bonuses from deferral contributions is probably no problem. However, if you have not operated according to your document, that is a problem.

Let's think "out loud" a minute here. If someone signs up for $100 per pay, than nothing extra should come out of bonuses. But if a Participant signs up for 6% of comp, than 6% of all comp should have been deferred. What is "all comp"? "all comp" is whatever the document says it is.

Starting 1-1-09, you can either amend the document or amend your payroll process. But what to do about the past years is a problem. I would think the Employer would be required to put in the amount that should have been deferred, plus gains (minus losses, I mean).

Then I would suggest looking at the dollar amount involved and deciding whether to file under VCP.

One other thought: If you look at the examples in Rev Proc. 2008-50, you might get the idea it would be ok to put in only half of the deferrals (I did). If the dollar amount involved was big enough to file under VCP I would try this, I think. If it is so small that you are just going to self correct, I think it would be best to put in the whole amount.

And remember that if there is a match involved you should put in the whole match, even if you only put in half of the deferrals.