Bonus rewards program

[Chippy]

I have a plan that has a quarterly rewards program based on the profits of the company. They give the participants the choice of taking it in cash or putting it in the retirement plan.

What testing must be done with this? I believe I have to include it in the adp test? but does it also count towards the annual deferral limit?

any other testing I should do?

[BG5150]

Is this reward offered to everyone?

Is it taken out pretax from their paychecks? (Is FICA still being taken? If I get a $1,000 reward, is only $940--or whatever--going into the 401(k) plan?)

[Doghouse]

It is definitely going to be subject to ADP testing and 402(g). I can't see how any other testing, other than the normal 415, would apply.

[My 2 cents]

I am not involved with defined contribution testing, but would it work this way:

a. Person A takes the entire bonus as an addition to their 401(k) plan. 402(g) must be satisfied and ADP testing must be satisfied.

b. Person B takes the entire bonus as cash. No 402(g) testing and Person B counts for all tests as someone who received no annual additions (at least with respect to the bonus).

Wouldn't that tend to make it harder for the plan to pass testing, since the lower-paid employees are more likely to take cash and the higher-paid employees are more likely to opt for the money to be paid into their 401(k) accounts?

[BG5150]

Again, make sure it goes through payroll...