401k Match percentage - Does it include bonuses?
I'm the owner of a small business with one employee other than myself, and I'm looking at 401k plans for the business.
A significant amount of this employees total compensation will end up coming from performance bonuses distributed periodically throughout the year;
When I'm looking at potential 401k plans, I can't tell if a given matching percentage will apply just to someone's salary, or also to their bonuses / total amount of compensation... and I'm trying to figure that out before deciding on which matching percentage to offer.
In summary - Are bonuses included as part of 401k matching (For nondescrimination Testing / Safe Harbor?)
UPDATE - I should have added, this is in reference to nondiscrimination testing / safe harbor testing for 401k plans. One of the options is to match 4%, 5% or 6% of someones pay, and I'm not sure whether that includes bonuses or not.
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I have seen it done either way. I have even had a company turn a profit sharing bonus into a company contrition to the 401(k).
If an employee is never going to get close to the maximum dollar contribution for the year, then having a bonus trigger a contribution and match is great. Though some employees will feel ripped off after the extra income taxes, and 401(k) contribution are removed from the bonus.
If the employee is going to reach the max contribution even without the bonus, the contribution and match just adds complexities.
I wonder if doing the contribution and match on a bonus when you are concerned about the participation rate of younger and lower paid employees will help pass the non-discrimination test. .
Every company I've worked for has matched contributions from all income regardless of source (salary, bonus, commission, etc.). Since you're choosing the plan and parameters, it's up to you, but I would match any contributions that come out of bonuses for several reasons:
Contributing a higher percentage from bonuses can be a way for some people to jump start their retirement savings and save some of the tax burden
Bonuses are still income from many other perspectives: tax, etc., so there's no reason why 401(k) matching couldn't be the same.
The total 401(k) contribution limit doesn't distinguish between "normal" income and bonus income.
If you don't match bonuses, employees can just contribute more from their paychecks, so you aren't really preventing anything.
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