Here’s a question I hear all the time: Can you exclude bonuses from the definition of compensation for purposes of the employer matching contribution?
Why would you exclude certain compensation from a company contribution like a match? With respect to bonuses, well they’re bonuses. Certain employers may not feel the need to match on discretionary bonuses. And that same logic can apply to salespeople who earn commissions. Some employees make so much in commissions that their matching contribution would be increased substantially if you used a definition of compensation other than base pay.
So can you exclude bonuses from the employer match? It depends. While there are certain discrimination hurdles you must get over, it is doable.
For “cookie cutter” plans offered by payroll providers, this presents additional discrimination testing issues, so the option is almost never offered. Payroll providers want to make the administration of your 401(k) plan easier for them, so they typically require you to include all of an employee’s compensation when calculating the employer matching contribution.
Our plan documents do allow for the flexibility to exclude certain forms of compensation from employer contributions, provided those exceptions pass certain annual non-discrimination tests.
That’s one of the benefits of having a professional Retirement Plan Consultant create a plan that’s customized for your organization’s needs. Using compensation exclusion techniques, you may save tens of thousands of dollars in additional contributions to employees, just by redefining the compensation that should be used in calculating employer contributions.
Too many businesses leave thousands of dollars on the table because they don’t get sound advice when they first start up a new retirement plan. Challenge a Professional Retirement Plan Consultant to find those savings and set up the best plan for you.