Withholding Employee Contributions on Irregular Pay (Bonuses)
It’s the most wonderful time of the year…for bonuses! We have received numerous inquires on how to handle irregular pay, so we would like to shed some light on whether or not employers should withhold employee contributions on bonuses.Unfortunately, there isn’t a straight forward answer to this as it largely depends on your Plan Document and how the employer implements this Administrative Procedure, but we are glad to share some insight and direct you to the correct solution for your Plan.
The majority of Plan Documents drafted by Sentinel are designed to help protect the Plan from the potential need for QNECs (Qualified Non-Elective Employer Contributions) or QMACs (Qualified Matching Contributions). The election made in the Administrative Procedure for Irregular Pay (i.e. Bonuses) states that in order for deferrals to be withheld, an employee must make a separate election for that pay. If the employee does not make an election, then there are no withholdings from bonuses or any other Irregular Pay.
With that in mind, we highly recommend distributing a separate Bonus Election Form. This will not only give your employees the opportunity to withhold from their bonus for employee contributions, but you can also retain for your records if they select to opt out of withholding. If you do not receive a Bonus Election Form back from an employee and your Plan Document has the default listed above, then you are not required to withhold from the employee’s bonus for employee contributions.
It is imperative to understand and review your current Plan Document to verify the elections on Irregular Pay.
Finally, we would like to point out that this is an Administrative Procedure. We make this distinction because even with the default selected in the Plan Document, the employer may choose to do otherwise. If this is the case, the employer simply needs to keep a separate written Administrative Procedure for bonuses that outlines the operational procedures.
Please don’t hesitate to give your friendly Sentinel Team a call if you would like to discuss this further.