It’s that time of the year again when many organizations will hand out employee bonuses. If you’re one of those fortunate organizations and you also offer an employee retirement plan, it’s important to consider how bonuses affect your 401(k) or 403(b) plan. The question you should ask is, do I withhold or do I not withhold contributions from an employee’s bonus?
Answer: It depends. The way to handle bonus for purposes of employee and employer contributions depend on the definition of compensation in your plan document. If your plan, for example, uses “W-2 Compensation” and specifically excludes bonus, you would NOT deduct employee 401(k) or 403(b) contributions from bonus. Mistakes happen where a plan document says to use all compensation, without any exclusions, and the employer fails to deduct contributions from bonuses. If you have a situation like this, immediate corrective measures should be taken to resolve the matter.
Looking to exclude bonus and/or commission for purposes of either employee deferral and/or employer match? Make sure your plan states the exclusion. The plan can be amended at any time to accomplish on a go forward basis. Exclusion of bonus, or any other types of compensation, requires additionally non-discrimination testing, therefore it is recommended you consult with your TPA or retirement plan consultant before proceeding.
A 12-year veteran in all aspects of workplace retirement plan benefits program, Mizan J. Rahman specializes in the compliance, administration, design, and legal documentation of 401(k), 403(b), and 457(b) plans. Mizan provides high-level, personalized consulting to small and medium-sized businesses and not-for-profit organizations. One of the select few to have been awarded Enrolled Retirement Plan Agent (“ERPA”) by the Internal Revenue Service, Mizan regularly represents clients in front of DOL and IRS during audits.
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