I'm thinking that after reading these new regulations, banks can go back to paying annual bonuses that INCLUDE interest income from mortgages to everybody - including loan officers. Is that that what you are thinking too, or am I reading incorrectly?

My interpretation is that such compensation may be subject to a 10 percent limitation. Consider the first "additional example" provided on page 33 of the official interpretations:

F. Additional examples. 1. Assume that, in a given calendar year, a loan originator organization pays an individual loan originator employee $40,000 in salary and $125,000 in commissions, and makes a contribution of $15,000 to the individual loan originator’s 401(k) plan. At the end of the year, the loan originator organization wishes to pay the individual loan originator a bonus based on a formula involving a number of performance metrics, to be paid out of a profit pool established at the level of the company but that is derived in part through the company’s mortgage originations. Assume that the loan originator organization derives revenues from sources other than transactions covered by §1026.36(d). In this example, the performance bonus would be directly or indirectly based on the terms of multiple individual loan originators’ transactions as described in § 1026.36(d)(1)(i), because it is being funded out of a profit pool derived in part from mortgage originations. Thus, the bonus is permissible under § 1026.36(d)(1)(iv)(B)(1) if it does not exceed 10 percent of the loan originator’s total compensation, which in this example consists of the individual loan originator’s salary, commissions, contribution to the 401(k) plan (if the loan originator organization elects to include the contribution in calculating total compensation), and the performance bonus. Therefore, if the loan originator organization elects to include the 401(k) contribution in total compensation for these purposes, the loan originator organization may pay the individual loan originator a performance bonus of up to $20,000 (i.e., 10 percent of $200,000 in total compensation); if the loan originator organization does not include the 401(k) contribution in calculating total compensation, the bonus may be up to $18,333.33.

Thoughts, anyone?

I haven't gotten all the way through it yet, but from what I have read, I would say that is correct grmasterb.

We are trying to develop our incentive plans for the upcoming year. If I understand it correctly, we can give them up to but not exceed 10% of their total compensation. When calculating their total compensation we should total their salary, bonuses and commissions, as well as 401K and profit sharing together correct? We add all of these together and can pay an incentive up to 10% of the total- Is this correct or am I totally off base?

That is how I am reading it so far, Heather301, but I haven't finished the whole final rule.

Just finished this section of the rule and preamble. From my notes:

Can pay bonuses based on profitability if the following conditions are met:
1--If the loan originator is below the de minimis amount of 10 closed transactions in a 12 month period (includes 10 referrals that resulted in consummated loans), there is no limitation on the amount of incentive paid from a non-deferred profits-based compensation plan
2--If the loan originator is above the de minimis amount, then the bonus is limited to 10% of total compensation (wages/tips in box 5 of W-2 + contributions to designated tax advantaged defined contribution plans-ie 401k, etc- paid by the bank).
3--The bonus performance metric, the total compensation calculation, and the de minimis amount of transactions must all be from the same review period (ie Jan 1-Dec 31, Apr 1-Jun 30, etc) regardless of when paid.

I think that's it in a nutshell regarding profits-based bonus pools. One question though---If we pay the 10% bonus in January for the previous year, can we include that in the total compensation calculation for the following year or do we need to net the bonus payment out?

My understanding is that you net the bonus payment out (i.e. if you pay in January for 2012, it counts as 2012 compensation).

So if we are paid a year end bonus and also receive a contribution to our 401K at year end , those two items together cannot exceed the 10% is that correct? It is not 10% per item?

Thanks grmasterb.

No, if the bank chooses, the bank 401k contribution can be added to salary/commissions to determine your denominator.

Ex-salary & commissions=100,000.00
bank 401k contribution=6,000.00
total compensation=106,000.00

In the above, the LO could receive up to 10% of 106,000.00, or 10,060.00 in bonus money from a non-deferred profits-based bonus pool.

Dani I think you mean $10,600 in bonus. $1060 is 1%.

Yep, sorry.....Math is not my friend, hence why I am the compliance officer and not loan officer or underwriter.

Thank you for the example Dani. I think I've got it, so 401k is under exception 1 and the bonus pool monies is under exception 2. Thanks for the help.

If people are getting a 10% bonus...I am at the wrong place!

Are these employer matching contributions or employee contributions?

For the calculation you only use bank/employer paid contributions.

Dani, I’m not so sure that your example is correct, in that the bonus income should instead be added to the total for purposes of determining if the bonus amount is eligible. Page 30 of the Official Interpretations, below with my underline, seems to indicate that the calculation includes the bonus, even if it’s going to be paid the next year.

“For example, assume that for calendar year 2013 a creditor pays an individual loan originator compensation in the following amounts: $80,000 in commissions based on the individual loan originator’s performance and volume of loans generated during calendar year; and $10,000 in an employer contribution to a designated tax-advantaged defined contribution plan on behalf of the individual loan originator. The employer desires to pay the individual loan originator a year-end profit-related bonus of $10,000. The commissions are paid and employer contributions to the qualified plan are made during calendar year 2013, but the year-end bonus will be paid in January 2014. For purposes of the 10-percent total compensation limit, the year-end bonus is counted as part of both the compensation subject to the 10-percent. limit and the total compensation for calendar year 2013 even though it is not actually paid until 2014. Therefore, for calendar year 2013 the individual loan originator’s compensation that is subject to the 10-percent limit would be $10,000 (i.e., the year-end bonus) and the total compensation would be $100,000 (i.e., the sum of the commissions, designated plan contribution, and the projected bonus); the bonus would be permissible under § 1026.36(d)(1)(iv) because it does not exceed 10 percent of total compensation.

Oops! Forgot to underline

“For example, assume that for calendar year 2013 a creditor pays an individual loan originator compensation in the following amounts: $80,000 in commissions based on the individual loan originator’s performance and volume of loans generated during calendar year; and $10,000 in an employer contribution to a designated tax-advantaged defined contribution plan on behalf of the individual loan originator. The employer desires to pay the individual loan originator a year-end profit-related bonus of $10,000. The commissions are paid and employer contributions to the qualified plan are made during calendar year 2013, but the year-end bonus will be paid in January 2014. For purposes of the 10-percent total compensation limit, the year-end bonus is counted as part of both the compensation subject to the 10-percent. limit and the total compensation for calendar year 2013 even though it is not actually paid until 2014. Therefore, for calendar year 2013 the individual loan originator’s compensation that is subject to the 10-percent limit would be $10,000 (i.e., the year-end bonus) and the total compensation would be $100,000 (i.e., the sum of the commissions, designated plan contribution, and the projected bonus); the bonus would be permissible under § 1026.36(d)(1)(iv) because it does not exceed 10 percent of total compensation."

I see what you're saying. It's like the 10% calculation is a back-end test instead of a formula for determining how much can be paid. It makes it much more confusing in my opinion to determine a bonus amount and then have to back into it to make sure it is within the 10%.

Thanks for pointing it out though.

If you want to ensure that the bonus won't be more than 10% of the total, another approach would be to determine total compensation prior to the bonus, and determine what amount is 1/9 (one-ninth) of the pre-bonus compensation (11.1111...%). For example, if the pre-bonus total is $87,500, one-ninth of that number is $9,722.22. If you add that result to the compensation amount, you get $97,222.22, and $9,722.22/97,222.22 = .09999998, or just a whisker under 10%. If you never round up when calculating the number that is 1/9 of compensation, you should be fine.

If the institution wants to pay a bonus AND do a 401k match, would both those amounts be used towards the 10% cap?

No. The 10% cap, if applicable, applies to the bonus, and not to the 401-k contribution.

Thanks so much!

Sorry guys...this is not crystal for me yet.

Using John's example; is the $87,500 salary and 401K contribution from bank?

The $87,500 number I threw out would be total compensation of all types (including any 401k employer contribution), before calculating the bonus.

Thats what I thought just wanted to be sure. Thanks