Signing bonus as 401k contribution?

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AdamP
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Signing bonus as 401k contribution?

Post by AdamP »

Other than company-specific bureaucratic or policy limitations, can anyone think of any legal reasons why a hiring company's signing bonus couldn't be given as an employer contribution to the soon-to-be-set-up 401k?

I know that employers aren't limited to just matching contributions, as my current one also makes yearly "bonus" contributions regardless of employee contributions.
Spirit Rider
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Re: Signing bonus as 401k contribution?

Post by Spirit Rider »

Companies have some latitude in making 401k discretionary employer contributions that do not violate ownership and HCE non-discrimination rules. These generally take the form of individual/group performance bonuses and individual/group/company revenue/profit goals.

A sign-on bonus as a discretionary employer contribution seems a bit of a stretch. At minimum it would have to be an established written part of the 401k plan.

Somebody like Alan S., who knows the details of the actual 401(k) law would have to chime in here.
Grt2bOutdoors
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Re: Signing bonus as 401k contribution?

Post by Grt2bOutdoors »

Possible form of discrimination. One party gets a larger contribution than the other members of the class.
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Watty
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Re: Signing bonus as 401k contribution?

Post by Watty »

Does the bonus need to be returned if you do not stay there for a period of time?
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AdamP
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Re: Signing bonus as 401k contribution?

Post by AdamP »

I'm just asking hypothetically; I don't know the terms yet.
Grt2bOutdoors wrote:One party gets a larger contribution than the other members of the class.
I don't understand what you mean by this. I assume most people (even in the same job) are paid differently. And those who are currently working do not get a sign-on bonus. To the company, the amount paid is the same. To the individual, the amount received can be vastly different due to taxes.
Spirit Rider wrote:At minimum it would have to be an established written part of the 401k plan.
I don't know enough about how stringently companies must follow their plans to even make a judgement call.
dailybagel
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Re: Signing bonus as 401k contribution?

Post by dailybagel »

AdamP wrote:Other than company-specific bureaucratic or policy limitations, can anyone think of any legal reasons why a hiring company's signing bonus couldn't be given as an employer contribution to the soon-to-be-set-up 401k?

I know that employers aren't limited to just matching contributions, as my current one also makes yearly "bonus" contributions regardless of employee contributions.
You're to be commended for trying to handle a signing bonus in a responsible manner.

If the direct contribution doesn't work out, could you increase your 401(k) contribution limits to contribute the equivalent amount, while living off the signing bonus?

For example, if monthly pay is $5,000, and the signing bonus is $10,000, you could cash the check for the signing bonus, and set your 401(k) deferral percentage to 50% for four months.

Might be a more realistic approach than asking the HR and payroll departments to push against the boundaries of known 401(k) plan law.
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AdamP
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Re: Signing bonus as 401k contribution?

Post by AdamP »

dailybagel wrote:could you increase your 401(k) contribution limits to contribute the equivalent amount, while living off the signing bonus?
Unfortuantly (for this case), I'll already be maxing out my pre-tax contributions for the year regardless. That's why I was hoping that I could get the bonus as an employer contribution instead of a check. If not, I'll be under the combined $52k limit this year even with max pre-tax, employer contributions, and as much post-tax as I could manage with timing issues.
deikel
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Re: Signing bonus as 401k contribution?

Post by deikel »

I think this is more of an administrative issue:

Your signing bonus will be payed out asap (and has potential claw back clauses to it), so your get the money prior to having set up the 401k contribution (and/or you may not be eligable for a while to contribute to 401k and or not become vested in the match for a while)

if you were to contribute and the company were to match than the effective signing bonus would be larger - depending on where the bonus is coming from budget wise, that may make a difference for the company. If it is coming all out of salary account of your respective group, than no differnece after 12 months.

I would take the bonus, increase the 401k contributions and pay yourself back....same net effect with less 'trouble maker' attitude
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archbish99
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Re: Signing bonus as 401k contribution?

Post by archbish99 »

AdamP wrote:
dailybagel wrote:could you increase your 401(k) contribution limits to contribute the equivalent amount, while living off the signing bonus?
Unfortuantly (for this case), I'll already be maxing out my pre-tax contributions for the year regardless. That's why I was hoping that I could get the bonus as an employer contribution instead of a check. If not, I'll be under the combined $52k limit this year even with max pre-tax, employer contributions, and as much post-tax as I could manage with timing issues.
If your plan allows after-tax contributions, those are subject to the $52k limit rather than the $17k limit. However, that's generally only a good idea if you can then do an in-plan Roth conversion of the after-tax contributions, do an in-service distribution and convert to a Roth IRA, or don't plan to work there for terribly long.
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AdamP
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Re: Signing bonus as 401k contribution?

Post by AdamP »

archbish99 wrote:If your plan allows after-tax contributions, those are subject to the $52k limit rather than the $17k limit. However, that's generally only a good idea if you can then do an in-plan Roth conversion of the after-tax contributions, do an in-service distribution and convert to a Roth IRA, or don't plan to work there for terribly long.
Yes, a lot of research went into this plan of action - which is why I referenced the $52k total limit. When I found out about after-tax contributions and the 415c limit, I was floored. Needless to say, I went about verifying how I could implement it right away. Yes, my current plan and custodian allow in-service distributions of after-tax contributions. And, as the thread implies, I don't plan on being here long (sadly, my sources say that prospective employer does not have after-tax contributions).

Also, I've been granted Boglehead wiki access to update and expand the information on the 401k page. I don't care how rare after-tax plans are, the possible savings are too huge to just dismiss. For me, it's an extra $25k in my Roth IRA per year (well, as long as I have this job).
HornedToad
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Re: Signing bonus as 401k contribution?

Post by HornedToad »

IMO, this isn't really worth the hassle/effort/troublemaking possibility and is not likely to be approved.

If you are doing 16.5k 401k + 5k Roth IRA/Backdoor-IRA then you are good on savings yearly and any remainder can be taxable/I-Bonds/etc.
manwithnoname
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Re: Signing bonus as 401k contribution?

Post by manwithnoname »

Grt2bOutdoors wrote:Possible form of discrimination. One party gets a larger contribution than the other members of the class.
Discrimination rules only apply to HCEs. In order to be an HCE employee must have earned more than 115k in the prior year. Cannot be an HCE in first year of employment.

Problem is that employer plan documents do not usually include sign on bonus as eligible comp for employer contribution to the plan.

Another problem is whether there are contingencies where the employer can tax back the sign on bonus e.g., if the employee is terminated within 6 months. Contingent comp is usually not comp for retirement plan purposes.
cherijoh
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Re: Signing bonus as 401k contribution?

Post by cherijoh »

manwithnoname wrote:
Grt2bOutdoors wrote:Possible form of discrimination. One party gets a larger contribution than the other members of the class.
Discrimination rules only apply to HCEs. In order to be an HCE employee must have earned more than 115k in the prior year. Cannot be an HCE in first year of employment.

Problem is that employer plan documents do not usually include sign on bonus as eligible comp for employer contribution to the plan.

Another problem is whether there are contingencies where the employer can tax back the sign on bonus e.g., if the employee is terminated within 6 months. Contingent comp is usually not comp for retirement plan purposes.
I don't think you are correct about HCE rules - these rules probably only apply to HCE at your current employer. I believe the HCE cut off values are determined by each company depending on the distribution of salaries and the participation at the lower end of the salary range. Also, not all companies base HCE on prior year salary as several posters found out about being considered HCEs after the fact and had contributions returned for the previous year. It all depends on how the plan is set up.

OP can certainly ask if this is a possibility, but unless plan is set up this way, he should expect a response similar to that given by Grt2bOutdoors.
Topic Author
AdamP
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Re: Signing bonus as 401k contribution?

Post by AdamP »

cherijoh wrote:OP can certainly ask if this is a possibility, but unless plan is set up this way, he should expect a response similar to that given by Grt2bOutdoors.
I was skeptical from the start, but thought it worthwhile to ask. Although I do know someone on the inside, I think this might be an uncomfortable topic to research (given that they were given a check). Once I have an offer in hand, I'll consider if I want to broach the topic again.

HornedToad wrote:If you are doing [17.5]k 401k + [5.5]k Roth IRA/Backdoor-IRA then you are good on savings yearly and any remainder can be taxable/I-Bonds/etc.
If it is true that the new company does not currently offer after-tax contributions, you can bet that I'll be petitioning for a change on day... 10 (don't want to rock the boat too soon). That's the equivalent of several years of Roth IRA contributions every year!
cherijoh
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Re: Signing bonus as 401k contribution?

Post by cherijoh »

AdamP wrote:
cherijoh wrote:OP can certainly ask if this is a possibility, but unless plan is set up this way, he should expect a response similar to that given by Grt2bOutdoors.
I was skeptical from the start, but thought it worthwhile to ask. Although I do know someone on the inside, I think this might be an uncomfortable topic to research (given that they were given a check). Once I have an offer in hand, I'll consider if I want to broach the topic again.

HornedToad wrote:If you are doing [17.5]k 401k + [5.5]k Roth IRA/Backdoor-IRA then you are good on savings yearly and any remainder can be taxable/I-Bonds/etc.
If it is true that the new company does not currently offer after-tax contributions, you can bet that I'll be petitioning for a change on day... 10 (don't want to rock the boat too soon). That's the equivalent of several years of Roth IRA contributions every year!
You may also run into some max contribution limits that are dictated by the plan (not the IRS). I was in a plan that allowed after tax contributions to 401K, but the amount we could put in from combined before- and after-tax was 15% of salary. So I wasn't able to get anywhere near IRS limits even with a 1:1 match up to 5% contribution ( for a grand total of 20% of salary which was way below the IRS $$ max :( ).
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