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The Bonus Problem


When I first started as an ERISA attorney, I worked for a kind man named Harvey Berman in 1998, working for his law firm affiliated with his third-party administration firm. During Christmas time, he gave me a $300. That was the first and last bonus I ever received.


I know people do get bonuses, my wife is an attorney and she gets it. The problem with bonuses is the treatment under 401(k) plans. While many plans exclude bonuses from the definition of compensation, many do not, and that means the bonus paycheck is subject to the deferral election made by the plan participant (unless the plan has a separate bonus election in their plan document).


Not letting participants defer their bonus when the plan document allows them to, creates what we call a missed deferral opportunity, which might require corrective contributions on your part as plan sponsors. To eliminate the potential headache, make sure participants can defer or exclude bonuses from the definition of compensation. As someone who fixes plan problems for a living, I just need you to understand that the best way to avoid a problem is avoiding the problem.

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