Review BEFORE the audit: not every income type is the same

April 15, 2023

Imagine this:

The sales team has the best quarter ever.

Five of seven team members win record-breaking performance bonuses.

To keep the momentum going, they are sent to a team-building retreat in Cancun. The company covers many expenses along the way but still comes out ahead. On top of that, each salesperson receives a special one-time bonus. 

Morale is at an all-time high. Turnover is nonexistent.

But did this just create a headache for your next 401(k) audit?

I’m not saying this as an advisor but as a friendly neighborhood auditor. Discrepancies show up when companies fail to properly manage off-cycle payrolls like special bonuses and unusual benefits, vis-a-vis their benefits plans.

Do employee 401(k) elections apply to bonus income? And were those amounts withheld? This is the kind of thing the IRS scrutinizes in its required annual audit for larger plans.


Is the 401(k) plan in compliance? In part, it’s up to the plan sponsor.

Salary and wages are always counted for 401(k) withholding.

When it comes to off-cycle pay, bonuses, severance (and more), whether compensation counts for 401(k) purposes depends on what the plan document states. They may all be treated like salary, or each may be different.

It’s up to the plan sponsor—however, once the plan has been designed,  sponsors have to stay consistent.

One of the biggest things an auditor looks for is whether the plan sponsor is doing what the plan document states with every category of compensation.

Many times, if bonuses (or other compensation) aren’t seeing appropriate withholding, it means the payroll system isn’t categorizing them correctly.

This can be fixed, but it’s always better to do it before an audit.


Align the payroll system with the 401(k) policies.

The old saying “an ounce of prevention is worth a pound of cure” applies to the payroll system. Any modern payroll solution can help plan sponsors meet all their 401(k) obligations… when it’s set up correctly.

Whether the sponsor uses a payroll provider or handles it in-house, they have to be sure the payroll team implements checks and balances throughout the system so it pulls the right amounts for 401(k) deductions across all compensation categories.

It is imperative that plan sponsors review the plan document, then review actual payroll system performance to verify everything the plan document states actually happens. If it doesn’t, plan sponsors should take action now, before it becomes a hassle during the audit.

Was your or your client’s last 401(k) audit a time-consuming headache? We can save the plan sponsor time and effort on their next audit. Contact Cassell Plan Audits for more information.

Leave a Reply

Your email address will not be published. Required fields are marked *