Contingent Bonus: Removal of Contribution

[ERISA25]

Here's the situation: Particpant A receives a bonus on 1/31/2011 and the company treats the bonus as eligible 401(k) compensation. Particpant has an election in place and the Company funds the contribution to the Plan on 2/02/11. However, under the bonus program, a participant forfeits a prorated portion of the bonus if he or she fails to remain employed through the end of the year. Participant terminates on 3/1/2011. Company decides to remove a portion of the 401(k) contribution that was made out of the bonus under the rationale that the participant did not have a right to the entire bonus b/c he did not remain employed. this seems problematic. Any thoughts?

The regs say that you may not fund contributions before the participant has perfomred the services to which the deferral relates. See treas. reg. 1.401(k)-1(a)(3)(iii)©. If there is a restriction on the bonus, i.e., continued employment, has the particpant peformed the services to which the deferral relates before satisfying the continued employment requirement?

[david rigby]

So, the "bonus" is contingent on future service?

Wow, is that a bad idea!

[Guest Sieve]

I think A has performed the services to which the bonus relates (since apparently it was determined & paid based on services already performed)--it's just that the bonus is subject to a substantial risk of forfeiture. But, the question is, as stated in the reg you cite, whether the deferral was made "after the employee's performance of services with respect to which the contributions [i.e., deferrals] are made . . ." (Emphasis added.)

Yet it does appear that, perhaps, the services have not yet been performed to which the deferral relates, since the deferral relates to compensation that may be forfeited--but, services have been performed to which the compensation relates, so is there really any difference? In any event, that reg (-1(a)(3)(iii)©) allows deferrals to be made "when the cash . . . would be currently available, if earlier [than when the services are performed]"--and the cash is treated as currently available, basically, when it is paid. (Treas. Reg. Section 1.401(k)-1(a)(3)(iv).) Here, the cash already was paid, no matter when we decide that the services relating to the compensation or the contributions were performed.

So, it would seem to me that the deferral and match are proper, and neither can be removed from the plan--unless there's been a mistake of fact. But I supect there isn't a mistake of fact, because the cash already has been paid properly, and I'm sure the plan bases deferrals on payment of compensation, so the deferral is proper when the compensation has been paid. It's just that the ADP& ACP likely will be higher than expected.

Anyone agree--or disagree?

[mbozek]

Here's the situation: Particpant A receives a bonus on 1/31/2011 and the company treats the bonus as eligible 401(k) compensation. Particpant has an election in place and the Company funds the contribution to the Plan on 2/02/11. However, under the bonus program, a participant forfeits a prorated portion of the bonus if he or she fails to remain employed through the end of the year. Participant terminates on 3/1/2011. Company decides to remove a portion of the 401(k) contribution that was made out of the bonus under the rationale that the participant did not have a right to the entire bonus b/c he did not remain employed. this seems problematic. Any thoughts?

The regs say that you may not fund contributions before the participant has perfomred the services to which the deferral relates. See treas. reg. 1.401(k)-1(a)(3)(iii)©. If there is a restriction on the bonus, i.e., continued employment, has the particpant peformed the services to which the deferral relates before satisfying the continued employment requirement?

The terms of the bonus as defined by the employer dont matter. Only the plan terms matter. Employee contributions are 100% vested. Under the non alienaition rule forfeiture of employee contributions are not permitted. Its not a mistake of fact if employer made a correct contribution authorized by the employee's election.