Bonus FAQs Revisited Rev. 08/22/08, E-mail Alert 2008-11

May an employer preclude a participant from making elective deferrals on bonuses by putting “0%” in the employee contribution section of the bonus option provision?

No. The employer may not designate a limit of 0% in the bonus option provision. To exclude bonuses as a source of elective deferrals, the employer must exclude bonuses from the definition of compensation. Note that bonuses may be excluded from compensation on nonstandardized adoption agreements but not on standardized or XPress adoption agreements.

The bonus deferral agreement allows participants to select a different elective deferral percentage to be applied to bonuses, up to the limit specified by the employer in the adoption agreement (for example, 50%). Our bonus salary deferral form contains the statement that “If you fail to return the the form on a timely basis, your regular deferral election percentage will apply.” Therefore, in this example, the employer must withhold 5% of the bonus as an elective deferral, based on the participant’s salary deferral agreement.

Our new EGTRRA document's Bonus Option number 1 helps prevent misunderstandings.

Bonus Option:

[ ] 1. Not applicable. The Plan’s definition of Compensation excludes bonuses from deferrable Compensation for both Elective Deferrals and Roth Elective Deferrals.

[ ] 2. Not applicable. Participants are not permitted to make a separate deferral election and the Participant’s deferral amount elected on their Salary Deferral Agreement will also apply to any bonus received by the Participant for any Plan Year.

[ ] 3. The Employer permits a Participant to amend his or her deferral election to defer to the Plan an amount not to exceed ________% (may be no more than 100%) or $________ [may be no more than the Code Section 402(g) limit and Code Section 414(v) limit, if applicable] of any bonus received by the Participant for any Plan Year.