October 2019 Client Profile

Amy is giving her employees large year-end bonuses in December for increasing sales, and some employees asked about putting their bonuses into their 401(k) plan. Can they, and what does she have to do to allow these lump-sum contributions?

If Amy’s qualified retirement plan documents don’t allow for lump-sum contributions, her company will need to work with legal and tax professionals to add the stipulation. This may take a pay period or more, so consider making the change now if you intend to allow future lump-sum contributions.

Amy will also need to ensure that making this change doesn’t trigger unintended consequences. For instance, will her company match the lump-sum amount?

Will the one-time contribution fall within the limits established by the plan? In the latter case, top earners who already contribute an amount close to IRS limits may exceed it with the lump-sum contribution, triggering penalties and other tax consequences.

While generous, Amy should first examine these and other considerations before making a decision.

Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.