When I first started working as an ERISA attorney in September 1998, I was pleasantly surprised when my boss Harvey Berman gave me a $300 bonus that December for the Holidays. That was the last bonus I ever got as an employee. That story has nothing to do with what I’m saying except that companies do give out bonuses.
The problem with giving out bonuses besides the cost of giving out bonuses is the mistakes made with a 401(k) plan. Most 401(k) plans have W-2 Compensation as their definition of Compensation for plan purposes. The problem there is that most employers don’t bother to allow employees to defer on those bonuses and get an allocation of employer contribution for the said amount. The problem? Employees had the right to defer that bonus and that’s a problem because the plan didn’t operate according to its terms. After they discover the error, the plan sponsor needs to correct and make an employer contribution that represents the employee’s “lost deferral opportunity”. The problem is that this error is rarely caught before an IRS audit, so the error ends up more costlier than it should be.
So if you give a bonus, find out what the definition of compensation for your plan is and give them the opportunity to defer bonuses when they have it and especially if you also have a separate bonus election in your 401(k) plan document.