TIPS: Bonus Compensation and Taxable Wage Base Change

Bonus Compensation

If your Company pays bonuses, commissions or other forms of irregular pay to your employees, it is important to answer one of the following questions. In the context of this tip, we will refer to bonus.

Do you . . .

  • apply a participant’s current deferral election to the bonus,
  • take no deferral deduction at all from the bonus, or
  • allow a participant to make a special election for the bonus

The answer is a provision in your Retirement Plan Document – under either the Administrative Procedures section of the Adoption Agreement or, if bonuses are excluded, the Compensation definition. If you aren’t sure how your plan treats bonuses, please contact your Paragon Consultant. Please note that most plans state that a participant’s regular deferral election automatically applies to bonuses and is typically considered part of compensation for employer contributions, such as match and profit sharing.

If your Plan indicates that a participant’s current deferral election should be applied to bonuses and you are not taking the deduction, the Internal Revenue Code considers this a “failure to implement an employee election” and requires that the Employermake a contribution to the plan in order to correct this. So it is extremely important that you review your Plan to ensure that your plan provisions relating to bonuses reflect your operation.

If your plan allows for a special election when a bonus is paid and you need a special election form, please contact us as we can provide you with one.

Please note that if your Plan does not permit a special deferral election for bonuses, but does allow per payroll deferral changes, a participant can simply change the deferral election prior to the bonus payment and then change it back to the regular deferral election as of the next payroll period. Keep in mind that if the bonus is paid with the regular payroll (same check), the change would generally apply to the entire paycheck.

Please be sure that your payroll department/provider is aware of how salary deferral deductions and employer allocations should be handled when it comes to bonus payments. Treating bonuses incorrectly could be very costly to the Employer. 

 Update to the Social Security Taxable Wage Base:

On November 27, 2017, the Social Security Administration announced an update to the 2018 Social Security Maximum Taxable Wage Base. The Taxable Wage Base for 2018 will be increased to $128,400. This is a $300 reduction in the amount previously announced as the 2018 limit. Please review your payroll system to make sure the correct amount is being used.