Deferral election procedure

[John Feldt ERPA CPC QPA]

The 401(k) plan document allows the timing for making deferral elections changes to be set by the employer under an administrative policy (outside the plan document).

The employer (a few hundred employees) would like to design a salary deferral procedure that has employees elect their deferral percent or amount from each paycheck (but such deferral election does not apply to any wages paid as a bonus).

For bonuses, the employer wants to apply something like a negative election, stating that the employee can only elect to defer from each bonus by making a special deferral election before each bonus is paid. Thus, an employee cannot make a standing election to say "please defer 3% from all future bonuses", instead they need to fill out an election each time.

They intend to announce the bonus amounts well ahead of their paydate to allow such special deferral elections to be made.

Although it seems like a lot of extra work for HR/payroll to plug these special elections in for each bonus, could this procedure be acceptable for a deferral policy?

[ETA Consulting LLC]

Sure, I see this all the time.

The key to realize is that it takes a well organized HR department. From the Recordkeeping (TPA) side, you won't even notice it. Another way would be to provide the special election (one-time election) to change the bonus deferral from the regular rate to the special rate. So, you're saying that unless you elect a different percentage, your regular election will apply.

This helps the employees because many would want to make the deferral as the bonuses are typically subject to 40% withholding anyway. So, if you can make an election that you know will pertain to only that bonus (i.e. 50%), you won't run the risk of the 50% deferral tapping into your regular payroll and causing you to fall short on rent and utilities.

It's a good HR department trying to do what's best for their employees.