Employer bonus through payroll

[bzorc]

I received the following question from a client: An employment agreement calls for an employee to receive a 7% employer bonus, subject to FICA, FUTA & SUTA taxes, but not Federal & State Withholding. It is the employer's intention to allow the employees the opportunity to take the bonus, less taxes, in cash, or to defer it into a 401(k) plan. The bonus will appear on Box 3 of the Form W-2, but not Box 1.

Has anybody run across this? I think it is OK, but would appreciate anyone's opinion on the subject. Thanks.