Incentive/Bonus Tied to Profit Sharing

[Guest wolfpack]

I am referring to the profit sharing allocation. If I read you correctly you agree that this can be done in the allocation formula but the cash bonus issue must clearly be an agreement outside but indirectly tied to the plan(except for the 401(k) deferral potential).

[Guest wolfpack]

Say you have a Profit Sharing allocation that gives different allocation reates to different divisions based on division profitability or productivity. But further the employer will give half of the profit sharing (say to the NHCEs)as a cash bonus(or they will give the option to the employee to take the cash bonus). I have heard about this type of arrangement but cannot see how it can work as part of a qualified plan. Has anyone seen this?

[Dowist]

Do you mean that once the bonus is determined for the division, that employees will be able to defer 1/2 of the their bonus to a 401(k) plan - this is (or used to be) a common way of doing 401(k) plans. You could also do this by having a special deferral election that applies just to bonuses - this is fairly common.

If 1/2 of the bonus will be contributed as a profit sharing contribution, and the bonuses are different for the different divisions, you do have some discrimination issues - but I believe it can be done if the plan is specific as to how to allocate the contributions that are made to the plan on behalf of all of the divisions - this the "definitely determinable benefits" issue, which was discussed extensively several years ago in connection with an IRS field guidance memo.