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Can my employer "single out" individual employees and not reward them with a bonus contribution to our 401k?

I participate in a company sponsored 401k plan. They award annual employee bonuses and contribute a portion of those bonuses to that plan but single out a couple of people. Is this legal? I can understand if they don't want to award a bonus but since part of it's going into the "big pot" how can they not contribute to each employees account?

Jul 14, 2014 by Kevin from Long Beach, CA in  |  Flag
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The short answer to this question is yes, the company can direct bonuses into a 401k. This is reasonably common. Depending upon the plan, and the type of plan (specifically, if the plan is a "Safe Harbor" plan) there can be some flexibility within contributions.

Essentially, in your example, Kevin - Employee B and C do not get a bonus. So - they are out of the equation from the get-go, as long as the event of them not getting a bonus doesn't throw off any of the nondiscrimination guidelines - which, based upon your description of their income - it probably doesn't.

Qualified Plan rules can be reasonably flexible as long as they comply with ERISA guidelines. Essentially, when a plan is examined, the primary question is - does the plan discriminate IN FAVOR of either the owners, or highly-compensated employees (HCE's)? In other words - are the owners using the plan to sock away more money (percentage-wise) then their employees are?

If not - if the contributions and matching dollars from the employer for the benefit of the high income earners compared with the "rank and file" fall into the Department of Labor's pre-described guidelines, then nothing prevents the company from giving additional monies to some workers as bonuses - and putting extra money into employee's 401k's as part of that bonus program.

Essentially - this serves several benefits. First, it provides additional security for the bonused workers - and it also may "tweak" some of the ratios to allow more contributions into the plan from some of the HCE's. Sometimes, if these ratios are not met - then plan participants who contribute heavily actually have to remove some of their contributions before the end of the plan year. Bonuses can fix this problem - another reason some folks might get a bonus, and others not.

Here is a link to the IRS's Plan Requirements Page. You can see some of the non-discrimination tests and the ratios there.


So - to sum it up - as long as the plan does not discriminate in favor of the highly compensated or the owners - and passes the ratio tests - then nothing prevents the company from GIVING away more dollars into the plan.

Jon Castle http://www.Wealthguards.com

2 Comments   |  Flag   |  Jul 14, 2014 from Jacksonville, FL

I love this site. Quick, helpful, detailed responses that don't take days in between. Thank you all. I will review the plan documents as well as all the references listed. I've been there 8 years as a full-time salaried employee. I'm 100% vested and make regular contributions every paycheck. I used to be a bonus rede pineA

Flag |  Jul 14, 2014 near Long Beach, CA

Sorry. Accidentally hit send on my phone. I used to be a bonus recepient but when I relocated at the company's request I "lost" that. Not sure how they rationalized that and when I asked I was told my new position wasn't a "bonus" one.

Flag |  Jul 14, 2014 near Long Beach, CA

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It depends. They probably can't do as you say within the 401k. 401k money is either contributed by the employee from payroll deductions, or by the employer in matching funds. Bonuses can't just be directed into a 401k. However there are so called "Executive Deferred Compensation" programs that allow executives to receive bonuses in other tax deferred vehicles with their own set of rules. This would get a bit complicated.

1 Comment   |  Flag   |  Jul 14, 2014 from Bridgewater, NJ

Thank you sir for a quick response. I'll try and further clarify. Every year the company awards annual bonuses to all but a couple of people. Let's say employee A makes $50K annually and they award a $5K bonus. Half of that $5K comes to them via a check with normal payroll deductions and the other half is deposited directly into their 401k account. Executive A makes $250K annually and is awarded a $50K bonus. Same payout. Owner A makes $?? and is awarded $?? bonus with same payout. Employee B & C make $ 100K each but are excluded from any bonus. I can get my hands around the fact that maybe ownership thinks that employee's B & C don't "deserve" a bonus but since they're making a contribution to the plan (albiet to each individual's account) shouldn't they have to include B & C as participants in the 401k "whole pie"?

Flag |  Jul 14, 2014 near Long Beach, CA

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Kevin, I agree with James that it depends on a variety of factors. First of all, if you're saying that your employer only awards cash bonuses to select people, then that in and of itself is not really a retirement plan issue. A company's compensation policies are separate and distinct from the retirement plan and whether or not someone gets a bonus can be determined based things such as performance, etc. Now once that compensation is earned, it is usually (but not always) eligible compensation for the plan. In a 401(k) plan, employees are allowed to defer, be matched upon and even granted other employer contributions upon bonus compensation, if the bonus money is "eligible compensation" under the plan. But if you as an employee are not entitled to receive a bonus, then that is another matter. Unfortunately, there are several other possibilities I can think of that might legally impede you from getting a plan contribution that other employees may have received (e.g., not meeting plan eligibility provisions, too few hours worked, employed under an excluded employee class, etc.). My suggestion would be first to request a copy of the Summary Plan Description ("SPD") and discuss with your supervisor the context of the bonus others received in the plan that you did not receive. Then revew the SPD to get better clarity on why you may not have gotten this money. Plan design and the provisions for plan eligibility and benefits must be clearly disclosed to plan participants. So it is very possible that the answer is something that can be determined by reading the SPD.

Comment   |  Flag   |  Jul 14, 2014 from Houston, TX

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Kevin, the short answer is, it depends. There are strict rules that restrict the employer from discriminating in favor of owners and highly compensated employees. But there are also formulas that can be used to pass the discrimination testing. In a sense, you are not allowed to discriminate, unless you do it their way so that it complies with a formula.

There is also the possibility that there is more than one company payroll (different ownership) or that there is more than one plan and certain employees are excluded, though I don’t necessarily think that is your case. It is always possible that they are doing something wrong, but there is a third party administrator that administers the plan and ascertains that everything is in compliance. If the plan has more than 100 -120 employees there is typically also an external limited scope audit done on the plan. So if they are doing something non-compliant (again, it is possible) there is plenty of shoulders where fiduciary responsibility will fall. Fines for non-compliance are enormous.

It sounds like an employee benefit HR issue. If the environment permits, I’d suggest you inquire with the right person in HR.

Comment   |  Flag   |  Aug 20, 2014 from Delray Beach, FL

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