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Year-End Bonuses and Fiduciary Responsibility

Written by Mike Purcell, CPA, Assurance Senior

The end of the year brings many joyful things – holidays, time with family and friends, and year-end bonuses. While your company’s attention may be focused on wrapping up the fiscal year, and not on next year’s employee benefit plan audit, your plan administrator should review your Plan’s treatment of employee bonuses to avoid potential penalties and fees.

Companies have a variety of ways of distributing bonuses at the end of the year for a job well done, whether it be cash bonuses, a bonus check, or bonuses added to a scheduled pay run. Whatever the mode of delivery, it is important to know whether bonuses are subject to the provisions of your employee benefit plan. Your plan document will define compensation subject to deferral, which may include taxable income, or wages, tips and other compensation on Form W-2. Throughout our employee benefit plan audits, we have observed Plans whose definition of compensation subject to deferral included bonuses, but in practice bonuses were excluded from participant deferrals to the Plan. Improperly treating bonuses for employee benefit plan considerations means that participants miss earnings on investments as well as any potential employer match on their deferral. Without the proper documentation, these missed deferrals subject the Plan to make required corrective contributions as well as account for lost earnings.

Some Plans have elected to give their participants an option to “opt-out” of subjecting their bonuses to deferral. By permitting this option, participants receive more of their bonus pay today and the Plan shields itself from corrective contributions and lost earnings. The opt-out election should be drafted by the Plan and evidenced through the signatures and dates of the participant as well as plan administrator and maintained in the participant’s permanent file.

The end of the year is a very exciting and busy time for all, but a few minutes ought to be dedicated to ensuring your Plan’s compliance and protecting your Plan from corrective penalties and fees. Should you have any questions about your Plan, please feel free to give us a call. GBQ is a member of the AICPA Employee Benefit Plan Audit Quality Center.