Bonuses in Safe Harbor Plans

[Madison71]

Employer has a 3% safe harbor with an additional matching component matching 50% of 6%. Matching contributions are per pay. Plan document excludes bonuses from the definition of compensation for deferrals only. Suppose Employee defers 6% of salary and earns $100,000 during the plan year with $50,000 in bonuses. Employee defers $3,000 for the plan year - 6% of $50,000 in compensation. Safe harbor contribution is $3,000 based on 3% of $100,000 since cannot exclude bonuses. Payroll department only matched 50% of $3,000. Isn't that match supposed to be $3,000 instead of $1,500 since it does not exclude bonuses?

Thank you!

[401king]

Employer has a 3% safe harbor with an additional matching component matching 50% of 6%. Matching contributions are per pay. Plan document excludes bonuses from the definition of compensation for deferrals only. Suppose Employee defers 6% of salary and earns $100,000 during the plan year with $50,000 in bonuses. Employee defers $3,000 for the plan year - 6% of $50,000 in compensation. Safe harbor contribution is $3,000 based on 3% of $100,000 since cannot exclude bonuses. Payroll department only matched 50% of $3,000. Isn't that match supposed to be $3,000 instead of $1,500 since it does not exclude bonuses?

Thank you!

If the formula is 50% up to 6% of deferrals, the $1,500 match is correct. $3,000 / $100,000 = 3%. 3%*50% = 1.5%. 1.5% * $100,000 = $1,500.

[Madison71]

Yes, but if deferrals did not exclude bonuses then he would have deferred $6,000 (6% of 100,000) so the match would have been $3,000 (50% of 6%). I guess what is confusing is that bonuses are not excluded from the definition of compensation for matching purposes. If bonuses weren't excluded from match then it would be discriminatory under 414(s) based on how the bonuses are paid. If participants cannot defer on bonuses, what benefit is there that bonuses are not excluded from the definition of compensation for matching purposes? Sorry for such a basic question - I just don't get it.

[Madison71]

I meant to say if bonuses were excluded from match then violation....

[Madison71]

I think I get it now. So, in my previous example of 100k comp. including 50k in bonuses, if the participant elects to defer say 12%, then the deferral would be $6,000 based on 50k - match would be based on 100k so $3,000 match. Is this correct? Sorry.

[Bird]

Just completely ignore his deferral election percentage and base the match on what he contributed (dollars). $1,500 is correct...maybe.

When you say "Matching contributions are per pay", well, if that's what the document says, then we have no idea what the correct match is, using total annual numbers. If you mean "matching contributions are deposited each pay but are calculated using annual comp", then $1,500 is correct.

[BG5150]

Matching contributions are per pay.

You calculate the match every paycheck. It's not a yearly calculation (according to the OP).

So, if bonuses are excluded for deferrals, they are also, in practice, excluded for match. There is no true-up.

And also, from the original scenario, if match was calculated on a yearly basis:

$50,000 comp for deferrals. $3,000 = 6% match = 50% of that--$1,500

$100,000 comp for match. $3,000 deferral is 3% of match comp, so, match would be 1.5% or $1,500.

amirite?

[Madison71]

Matching contributions are contributed per pay. The match is based on percentage of compensation earned throughout the entire year (50% up to 6%). A true-up is made each year.

Changing my fact pattern a bit - if Participant elected to defer 10% per year and Participant's compensation totaled 100,000 for the plan year ($50,000 is bonus) at the end of the year, Participant would have deferred $5,000 b/c bonuses are excluded from deferrals. The company matched only $1,500 during the year. This would be correct if based on $50,000 in comp., but compensation does not exclude bonuses for the match. Would an additional matching contribution of $1,000 be made at year-end?

[BG5150]

Matching contributions are contributed per pay. The match is based on percentage of compensation earned throughout the entire year (50% up to 6%). A true-up is made each year.

Changing my fact pattern a bit - if Participant elected to defer 10% per year and Participant's compensation totaled 100,000 for the plan year ($50,000 is bonus) at the end of the year, Participant would have deferred $5,000 b/c bonuses are excluded from deferrals. The company matched only $1,500 during the year. This would be correct if based on $50,000 in comp., but compensation does not exclude bonuses for the match. Would an additional matching contribution of $1,000 be made at year-end?

For match: $5,000 deferrals on $100,000 match comp = 5%. match should be $2,500. So, yes, the $1,000 true-up is needed. (IMHO)