Impact of non-match eligible bonus on IRS annual compensation limits

[Puzzled]

This is probably an easy question but I'm lost reading US code trying to answer this. I'll use an extreme example of my question to simplify the basic question.

 

A company has a 401k plan that matches employee contributions 100% up to 4% of salary. Bonuses do NOT qualify for a company match. 

 

An employee has an annual salary of $360k, paid equally over 24 pay periods throughout the year, from which the employee contributes 5% from each check toward their 401k. The employee received a $360k bonus on January 5th, before they received their first 'normal' paycheck of the year. 

Is the employee eligible for a match because the bonus was excluded from the IRS limits? Or are they ineligible for a company match because they reached the IRS annual compensation limit prior to receiving a regular paycheck? Secondly, what code section, etc contains the answer to this question?

 

Thank you for your thoughts!

[WCC]

Unless the plan document says otherwise, this paragraph from the preamble to the 415 regs is what I have relied on when this question comes up. You are not required to count compensation on a FIFO type accounting basis. Pending wording in the document, this individual is match eligible. Not because the compensation is ineligible for match, but because you are not required to count the first dollars earned towards the limit. 

https://www.federalregister.gov/d/E7-5750/p-111

"As noted above, the final regulations provide that a plan cannot take into account compensation in excess of the section 401(a)(17) limit. In addition, the final regulations provide that elective deferrals can only be made from compensation as defined in section 415(c)(3). However, in applying these two rules, a plan is not required to determine a participant's compensation on the basis of the earliest payments of compensation during a year."

[Puzzled]

Thank you very much WCC. I was researching that questions in lots of places, but not the right place. The response is very much appreciated, especially the link to the applicable final regulation. 

[Artie M]

Agree with @WCC, especially the caveat "unless the plan document says otherwise." 401(a)(17) does not itself provide that the first dollars paid during the year eat up the annual comp limit. If the plan defines comp for matching purposes as salary excluding bonuses, the excluded January bonus ordinarily doesn't eat up the limit. However, the plan document controls, including whether compensation is determined annually or by payroll period and the order in which the bonus exclusion and §401(a)(17) limitation apply. See Code §401(a)(17) and Treas. Reg. §1.401(a)(17)-1(b).  That is, what if the plan stated Compensation means the first $360,000 of W-2 compensation paid during the year. Bonuses are then excluded from compensation used for matching contributions.  plus, if the plan expressly calculates the match separately for each payroll period, the document and administrative procedures become especially important. Treas. Reg. §1.401(a)(17)-1(b)(3)(iii) recognizes formulas that determine comp and accruals for periods shorter than 12 months and generally requires a prorated comp limit.  That said, merely depositing the match each payroll period doesn't make each payroll period a separate determination period. Many plans fund matches per payroll but calculate matches on annual comp, sometimes with an annual true-up.  Presumably, the bonus exclusion satisfies the applicable 414s, 401a4, and 401m requirements.