Confused about 401K entry date and income eligibility

[Ajay Mani]

Hello, 

I need some counsel from the group - 

I was employed for all of 2019 with my current company. 

On Feb 2019:  I received a lump sum bonus - 50K from my employer. I was NOT enrolled in my employers 401K and therefore no 401K contribution was made from my bonus.

On March 2019: I joined 401K plan.  

Does the bonus of 50K in Feb count towards the "income eligible for 401K" for 2019 - given I enrolled in March?

Hear this! I don't expect that contribution will be backdated to the bonus check.  But when I contribute 5% of my annual compensation to 401K in my fidelity401K system, it is 5% of "what"? ---  is it the "total annual compensation including the bonus" or the "compensation received after the enrollment date"?

Please advise, and if there is a IRS bulletin where this is clearly articulated?

[ratherbereading]

It depends on what the plan document says re. compensation.  Does it include bonuses? Does it include full-year compensation or compensation as of participation? That should be addressed in the Summary Plan Description you should have received from your company.

[Bird]

3 hours ago, Ajay Mani said:

But when I contribute 5% of my annual compensation to 401K in my fidelity401K system, it is 5% of "what"? ---  is it the "total annual compensation including the bonus" or the "compensation received after the enrollment date"?

Generally speaking, your contributions will be 5% of each pay* if your enrollment election is 5%.  It's unlikely your form/system says x% of "annual" compensation.  

*Just to make it interesting, if/when you get another bonus, that may or may not be considered "pay" - plans can exclude bonuses from compensation.  The answer should be in your Summary Plan Description.

[Larry Starr]

On 4/17/2020 at 4:16 AM, Ajay Mani said:

Hello, 

I need some counsel from the group - 

I was employed for all of 2019 with my current company. 

On Feb 2019:  I received a lump sum bonus - 50K from my employer. I was NOT enrolled in my employers 401K and therefore no 401K contribution was made from my bonus.

On March 2019: I joined 401K plan.  

Does the bonus of 50K in Feb count towards the "income eligible for 401K" for 2019 - given I enrolled in March?

Hear this! I don't expect that contribution will be backdated to the bonus check.  But when I contribute 5% of my annual compensation to 401K in my fidelity401K system, it is 5% of "what"? ---  is it the "total annual compensation including the bonus" or the "compensation received after the enrollment date"?

Please advise, and if there is a IRS bulletin where this is clearly articulated?

Why complicate your life?

Determine how much IN DOLLARS you want contributed by year end. Subtract how much you have contributed so far.  That is what you have left to contribute this year.

Determine how many paychecks are left until year end where you can modify your deferral election.  Divide the amount left to contribute (calculated above) by the number of paychecks left. That is your amount per paycheck until the end of the year that you want to defer.  Fill out a new election with that dollar amount.  Remember to change it for the beginning of next year for a full year calculation.

If you really want a percentage, you can determine what percentage that is of your regular check, but if your check changes, your results at year end may or may not be what you want, so a dollar amount avoids all that.

[justanotheradmin]

6 hours ago, Ajay Mani said:

Does the bonus of 50K in Feb count towards the "income eligible for 401K" for 2019 - given I enrolled in March?

Hear this! I don't expect that contribution will be backdated to the bonus check.  But when I contribute 5% of my annual compensation to 401K in my fidelity401K system, it is 5% of "what"? ---  is it the "total annual compensation including the bonus" or the "compensation received after the enrollment date"?

I think the most basic way of looking at it is - you cannot make deferrals from pay already received. 

Your 5% election will apply to future eligible pay, not any compensation previously paid. Plan accordingly. 

[Luke Bailey]

7 hours ago, justanotheradmin said:

I think the most basic way of looking at it is - you cannot make deferrals from pay already received. 

Your 5% election will apply to future eligible pay, not any compensation previously paid. Plan accordingly. 

And for sure it's too late to contribute in 2020 using 2019 income, which I think is what you were asking! You have what's left of the $50k after taxes. Use that for living expenses and jack your 2020 401(k) election as high as you want (or not). (Not a perfect solution if missed some 2019 match, though; I understand that). Also, consider that if it had been contributed last year, a significant percentage might have been lost in first quarter, depending on your investment style. Good luck.