The Bonus Headache

Bonuses are nice, I wouldn’t know because in the 11 years I was an employee, I got $300 for the holidays after I started in September 1998 and never received one again. This article isn’t about my lack of bonuses, but it’s about bonus payments and 401(k) plans because if you pay one, you might have a problem that you didn’t realize.

401(k) plans are governed by their plan document and most plan documents use W-2 compensation (plus deferrals) as the point to measure salary deferrals and employer contributions. W-2 includes bonuses, so that means that salary deferrals and employer contributions should be made from bonuses (unless the plan document excludes it).

So I have found many plan sponsors having issues because they forget that, which means they owe corrective contribution for missed deferral opportunities and employer contributions that should have been made. The problem with those errors is that it’s usually discovered after years and years of failing to account bonuses as compensation, which will require a lot of corrective contributions that will also have to be adjusted for earnings.

If you regularly handout bonuses, make sure that your definition of compensation meets what you are currently doing.

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