Company Bonus as 401K Contribution

[Bogart99]

I currently max out my 401k and my company has a 3% contribution match. I am currently putting in around $22,000 a year in my 401k ($19K + $3K company match). I get a bonus every year of around $5,000 that I receive through payroll. Can a company decide to designate the bonus as a company 401k contribution and put the money in my 401k instead of paying me through payroll? I would rather put more money in my 401k and avoid taxes but I don't know if that is something that is allowed by the IRS. If so, my company currently does not allow it but maybe we could get them to change.

[bacchi]

Yes, this can be done if the plan allows it.

However, it's tricky because of the HCE rules. If the bonus is 10%, you can see how a C-level exec would love this idea since they can put their (10% of $250k) bonus into their 401k. There would need to be some kind of maximum to avoid tilting the % contributed towards the owners/execs.

[MaybeBabyMustache]

I work at a large, publicly traded company. We've always had the option of maxing out our 401K with our bonus (paid out in January). My bonus is more than the IRS 401K limits, but it first maxes out the 401K, then I get the rest. This year, the company opted to switch the default - you now max out your 401K first if you do nothing. To not have that happen, you must opt out. It made life easier for me, and encourages full 401K maxing. (This should not be a problem for a significant portion of the workforce at my employer, given salaries).

[EvenSteven]

This same question came up a few months back.

I still say that employer contributions have to be the same percentage for all employees. You can't have a company contribute 5% for employee A, then 30% for employee B.

I seem to be in the minority of posters who hold this view, but I'm sticking to it, gosh darn it.

[Bogart99]

How is the company contributing more for certain people? You either get the bonus in cash or it gets put in your 401k.

[EvenSteven]

How is the company contributing more for certain people? You either get the bonus in cash or it gets put in your 401k.

I don't understand your question. You don't see how the company is contributing more to a certain employees 401k if they contribute more to their 401k?

Getting the bonus in cash as compensation has different rules than contributions to a 401k plan.

[PDXTabs]

How is the company contributing more for certain people? You either get the bonus in cash or it gets put in your 401k.

Because usually in the USA bonuses are discretionary. So some employees might get a $0 bonus while others get a $20K bonus. On the face of it it would seem easy to run afoul of the HCE rules. But while I'm not a tax lawyer there are ways around that AFAIK (eg, Safe Harbor Contributions).

[AnonymousCoward]

I'm in the same situation as MaybeBabyMustache. My job also allows this, you can specify what percentage of your bonus goes to the 401k. I pick 100%, obviously. Since the bonus arrives in January it helps me front-load my 401k contributions.

You can ask your employer to set this up. Here's an article about how to campaign for a better 401k plan: https://www.bogleheads.org/wiki/How_to_campaign_for_a_better_401(k)_plan

FWIW, my plan is through Vanguard. If your 401k is with Vanguard I assume this is something they could set up for your company too.

(not to derail the thread, but it pains me to read people speculating about tax laws on this forum. If you don't know something, research it or defer to someone who does know.)

[wageslave23]

You can have your employer put it in your 401kon your behalf as an employee contribution up to your max.  But what the OP is proposing is not allowed.  The employer has to designate a certain amount towards profit sharing and then it gets tested to see which employees are allowed to get what amount allocated to them. 

[EvenSteven]

I'm in the same situation as MaybeBabyMustache. My job also allows this, you can specify what percentage of your bonus goes to the 401k. I pick 100%, obviously. Since the bonus arrives in January it helps me front-load my 401k contributions.

You can ask your employer to set this up. Here's an article about how to campaign for a better 401k plan: https://www.bogleheads.org/wiki/How_to_campaign_for_a_better_401(k)_plan

FWIW, my plan is through Vanguard. If your 401k is with Vanguard I assume this is something they could set up for your company too.

(not to derail the thread, but it pains me to read people speculating about tax laws on this forum. If you don't know something, research it or defer to someone who does know.)

The OP already maxes the employee contribution. They want to have the bonus put in their 401k as an employer contribution. If you know the relevant tax law I would love to defer to you, but so far you haven't addressed the situation proposed by the OP.

[PDXTabs]

I'm in the same situation as MaybeBabyMustache. My job also allows this, you can specify what percentage of your bonus goes to the 401k. I pick 100%, obviously. Since the bonus arrives in January it helps me front-load my 401k contributions.
...
FWIW, my plan is through Vanguard. If your 401k is with Vanguard I assume this is something they could set up for your company too.

(not to derail the thread, but it pains me to read people speculating about tax laws on this forum. If you don't know something, research it or defer to someone who does know.)

I just wanted to clarify that I too used to have a job like this with Fidelity as the 401k provider, but my employer did make safe-harbor contributions.

[mak1277]

I'm in the same situation as MaybeBabyMustache. My job also allows this, you can specify what percentage of your bonus goes to the 401k. I pick 100%, obviously. Since the bonus arrives in January it helps me front-load my 401k contributions.

You can ask your employer to set this up. Here's an article about how to campaign for a better 401k plan: https://www.bogleheads.org/wiki/How_to_campaign_for_a_better_401(k)_plan

FWIW, my plan is through Vanguard. If your 401k is with Vanguard I assume this is something they could set up for your company too.

(not to derail the thread, but it pains me to read people speculating about tax laws on this forum. If you don't know something, research it or defer to someone who does know.)

The OP already maxes the employee contribution. They want to have the bonus put in their 401k as an employer contribution. If you know the relevant tax law I would love to defer to you, but so far you haven't addressed the situation proposed by the OP.

Agree.  I don't think the employer can put the bonus into the 401k as an employer contribution for some, but not all, employees.  And you'll never get a majority of employees to agree to do that.

[Chris @ Saturday Financial]

Yes, EvenSteven is correct.

There are many types of 401k contributions.  Depending on the way an employer sets up the plan, some or all of these options may be available. Unfortunately none of these options would allow a company to do what the OP is hoping.

1) Employee contribution. (The OP already contributes the maximum of $19,000. So they can't contribute any more even if they receive a bonus.)
2) Employer match contribution. (Companies have to offer an equal percentage to all employees.)
3) Employer safe harbor contribution. (Companies have to offer an equal percentage to all employees.)
4) Employer profit-sharing contribution. (Companies have a few options here, but they can't just pay out one employee's bonus as a profit-sharing contribution because the employee requests it. For more info see the link below)

https://www.guideline.com/blog/profit-sharing-plans-the-nuts-and-bolts-of-a-great-benefit/

[Chris @ Saturday Financial]

I'll add this for the OP: If your employer is small or medium sized, it's theoretically possible that you could convince your company to add profit-sharing contributions to your 401k plan.  The conversation could go something like this:

"Mr./Mrs. Senior Executive, has our company ever considered adding profit-sharing to our 401k plan? It could be a major tax benefit for both the company and for all of our employees, you and me included.  Instead of paying out our full bonus amounts as cash payments, we could pay out the first X% of each employee's salary as a profit-sharing contribution.

Example: Let's imagine our company decides to give all employees a flat 3% profit-sharing 401k contribution this year.  Jeff's base salary is $100,000, so he would receive $3,000.  Under our current bonus structure, Jeff would have received a $12,000 cash bonus this year.  Instead, the company can give him the $3,000 profit-sharing 401k contribution and a $9,000 cash bonus.  The $3,000 would be tax-advantaged for everyone involved.  Win-win, amirite?"

[Edit: typo]

[wageslave23]

I'll add this for the OP: If your employer is small or medium sized, it's theoretically possible that you could convince your company the add profit-sharing contributions to your 401k plan.  The conversation could go something like this:

"Mr./Mrs. Senior Executive, has our company ever considered adding profit-sharing to our 401k plan? It could be a major tax benefit for both the company and for all of our employees, you and me included.  Instead of paying out our full bonus amounts as cash payments, we could pay out the first X% of each employee's salary as a profit-sharing contribution.

Example: Let's imagine our company decides to give all employees a flat 3% profit-sharing 401k contribution this year.  Jeff's base salary is $100,000, so he would receive $3,000.  Under our current bonus structure, Jeff would have received a $12,000 cash bonus this year.  Instead, the company can give him the $3,000 profit-sharing 401k contribution and a $9,000 cash bonus.  The $3,000 would be tax-advantaged for everyone involved.  Win-win, amirite?"

Yes, this would be a good option and the only way to sort of do what the OP is proposing.