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Excluding bonus from deferrals but not match


Rai123

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This is a weird ...A client would like to exclude bonuses from deferrals but not match. In short, they are finding it a pain to set up the deferral's deductions via payroll, so they don't' want to allow participants to be able to defer from their bonus but don't mind matching on bonus compensation. Is this permissible.

The match formula is 33% up to 6% funded annually, I believe for anyone that defers over 6% it doesn't matter that they can't defer on bonus they will get match on the total gross.

However, if they defer less than 6% then there's nothing to match on. I feel like this set up may be discriminatory. Do you see anything wrong with this set up?  Overthinker here so sorry if this is a stupid question.

Here are the match examples:

10% deferrals (more than 6% example)

Base Compensation $125,000 Bonus Compensation $10,000 Gross $135,000 - participant defers $12,500 which is 10% of their base salary, they cannot defer on the $10k bonus. Calculating the match in this example if match includes bonus would mean the match is $2673. ($12,500/$135,000=9.26% deferral % they are deferring more than 6% so 135k*.6%*33% =2673). It doesn't matter if they had deferred the 10% on the bonus the match would still be the same.

 

5% of deferrals (less than 6% example)

Base Compensation $125,000 Bonus Compensation $10,000 Gross $135,000 - participant defers $6,250 which is 5% of their base salary, again they cannot defer on the $10k bonus. Calculating the match in this example if match includes bonus would mean the match is $2,062.50 ($6250/$135,000=4.63% deferral % they are deferring less than 6% so 135k*.4.36%*33% =2062.50)

However, in above example let's assume they were able to defer on bonus, the match would be $2227.50 (6750/135000=5%) 135k*5%*.33=2227.50.

Again we/I may be overthinking this but if they defer less than 6% and cannot defer on bonus, they truly get less of a match than if they deferred more than 6% they end up benefiting even though they can't defer from bonus.

 

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As long as

(a) document defines the compensation that way by source, and

(b) the compensation definition isn't discriminatory (414(s) testing)

Then this should be fine.  Maybe a suggestion to make sure the SPD spells that out well enough so people aren't leaving match money on the table for only doing 6% of the base pay, but otherwise folks just need to think it through and maybe sign up for more than 6% so that they still clear 6% of their entire "match compensation" figure.

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