Match as Bonus

[austin3515]

When plan was drafted a couple of key people got excluded from the match because they had not yet met eligibility for the match (but they did defer).

Does anyone have a problem with the company providing a "bonus" equal to what the match would have been, which the employee can then contribute the plan as 401k (they are well under the 17,500 cap)? I seem to recall that there is some rule that prohibits anything be provided on account of elective deferrals other than "match."

It seems to me that an employer should be free to provide a bonus for any reason imaginable.

Thoughts?

[ETA Consulting LLC]

No problem. All you are doing is giving them additional Compensation and reporting it as such. With that, they are merely given an election to defer.

So, you answered your own question when you stated that they are well under the $17,500 limit, because that would appear to be your only concern (not exceeding that limit).

Keep in mind that when it is paid as Compensation, it will be subject to FICA; unlike employer contributions to the plan.

Good Luck!

[jpod]

I think you (may) have a problem under the rule in the regulations which austin correctly recalled if you make a commitment before the fact to give them a bonus equal to the missed match. But if it is entirely after-the-fact I think it's ok.

[401_noob]

I seem to recall that there is some rule that prohibits anything be provided on account of elective deferrals other than "match."

I think you are referring to IRC 401(k)(4)(A) and Treasury Regulation 1.401(k)-1(e)(6).

[ETA Consulting LLC]

If EVERYONE deferred at least the amount to receive the match (i.e. there is no HCE who failed to defer), then it is a non-issue; you're only dealing with an issue where each HCE is receiving a same percentage of salary. That would leave no audit trail suggesting violation of the contingent deferral rule. Fact patterns are important.

Good Luck!

[austin3515]

This was entirely after the fact. We sent the allocation and they said "why aren't we getting the match?" And they are both NHCE's. So I think we are good... We definitely did not say "if you defer we will give you a match."

i) General rule. A cash or deferred arrangement satisfies this paragraph (e) only if no other benefit is conditioned (directly or indirectly) upon the employee's electing to make or not to make elective contributions under the arrangement. The preceding sentence does not apply to—

This bonus was NOT conditioned on making deferrals. It is based on deferrals but it was not a PRE-condition.

Thanks for finding the cite for me!

[Flyboyjohn]

Better yet since they're both NHCEs how about a profit sharing contribution for just them (assuming you have each participant in a separate class) of what the match would have been?

[austin3515]

Good idea but this is a non-profit and that would not work out... The red tape! It's also audited, etc.