Deferral Question

[Guest Theresa]

I had a strange question come up today. We had a client ask if a bonus that was given to an employee at the end of the year can be put directly into a 401(k) deferral account. I have never heard of this, however this client says they have a participant in their plan who claims her husband is in a plan where this can be done.

[Guest JWBrown]

I've seen a prototype document where one of the check boxes was the option for a participant to make a separate election for bonuse compensation. So I suppose it would depend upon whether the plan document allows or provides for a separate election.

[Guest Hardy Eubanks]

I've seen a Fidelity prototype document with language in it that allows for this. It also has language for a "catch-up" contribution.

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[Alf]

It is worth repeating that you have to look at the terms of the plan. Each plan is different.

Specifically, check the definition of compensation for purposes of the deferral elections - the bonus may already be subject to the participants existing election. If not, once the bonus is payable (the period that the services are to be performed is complete), it is too late to get another deferral election.

Also, there is no limit on the percentage that can be deferred into a plan except for the 10500 and 25% of compensation rules. So, if the plan permits the employee to defer 100% of a bonus, that is ok.

[IRC401]

As long as the document permits it and as long as the deferral election is made before the bonus is made available, they are ok.

[Guest JF]

Seems the issue ere is not whether a separate election, but the timing of the deferral elections in the doc. Assuming that bonuses are part of the definition of compensation and eligible for deferrals, then how often does the doc say you can change your elections ? You can change the deferral election (if in the doc) right up to the point the check is handed to you provided that the company is willing to administer that. I do not believe that the deferral election must be made prior to the accrual of the comp, but when the comp is actually paid. So you can get paid once per month and make your deferral election the morning of March 31st for your monthly check, and this is ok provided your document allowed you to change deferral elections at any time. Any opinions to the contrary ?

[Jon Chambers]

I'd agree with JF. And from a historical perspective, the whole concept of 401(k) stemmed from a deferral of annual bonuses. 401(k) started as a bridge between cash profit sharing (bonuses) and deferred profit sharing (typical profit sharing plan). It's funny that we now think of a special deferral election on a year-end bonus as somehow unusual. I still work with lots of sponsors that permit special elections on the year end bonus, with the obvious caveat that the deferral must satisfy the 415 and 402(g) limits, etc.

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Jon C. Chambers

Principal

Schultz Collins Lawson Chambers, Inc.

(415) 291-3004