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Compensation, Severance, and Unused Vacation Pay


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7 replies to this topic

#1 Calavera

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Posted 03 June 2010 - 09:04 AM

FACTS:

Plan defines Compensation as:
Participant's wages as defined in Code Section 3401(a) and all other payments of compensation by the employer (in the course of the Employer's trade or business) for a Plan Year for which the Employer is required to furnish the Participant a written statement under Code Sections 641(d), 6051(a)(3) and 6052. Compensation must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). The determination of Compensation shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 132(f)(4), 402(e)(3), 402(h)(1)(B), 403(b) or 457(b), and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions.

Plan states that Benefit Service ends on the date Employee severs employment with the Employer and defines service as elapsed time.

Company has a policy to pay for any unused vacation accumulated by the termination date (could equal the annual compensation if somebody worked over 25 years without taking any vacation) within couple weeks after the termination of employment.

QUESTIONS/CONCERNS:

1. Based on the Compensation definition above, it appears that the final year compensation will include severance pay and will also include the unused vacation pay. Correct?

2. So if somebody terminates the employment on 7/1 and week later receives his severance pay for another 6 months, I will have to use 6 month of service for the last year and full annual pay to calculate retirement benefits. And if this employee has 52 weeks of accumulated non-paid vacations, I would really use double annual salary for the final year. Correct?

3. If client wants to amend the compensation definition to exclude unused vacation pay for benefit calculation purposes, will it make the compensation definition a non safe harbor definition subject to the compensation testing?

4. If client wants to amend the compensation definition to exclude severance pay for benefit calculation purposes, will it make the compensation definition a non safe harbor definition subject to the compensation testing?

#2 rcline46

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Posted 03 June 2010 - 09:22 AM

First look at what was chosen in the Final 415 regulations amendment, your answer could be there.

#3 Calavera

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Posted 03 June 2010 - 03:42 PM

I am not sure how this will change the answer.

In the final 415 regulations amendment, the Code §415©(3) Compensation will include post-severance compensation and payments for unused vacation. But this is for the 415 calculations isn't it? I thought it shouldn't impact the accrued benefit calculations under the Plan Document which are well below the 415 benefits.

#4 rcline46

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Posted 04 June 2010 - 06:22 AM

No, the amendment defines 415 compensation, and most of the amendments also say the definition applies to 'plan compensation'. Most plans start with the 415 compensation and then make allowable changes under 414(s) to create 'plan compensation'. Prior to the new FInal 415 regs, 415 specifically excluded all pay after severance. Now, (shortened version) anything the employee would have received if they remained in service is now 415 compensation UNLESS pieces are specfically excluded. And guess what, some of the excluded pieces throw you out of the Safe Harbor compensation definitions and into the 414(s) testing.

#5 Calavera

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Posted 07 June 2010 - 10:38 AM

I think I am ok with the Safe Harbor definition. Since I can eliminate unused vacation pay from the 415 compensation, it will keep my Plan Compensation as the Safe Harbor Compensation.

But this is what my problem is. I tried to read Code Section 3401(a) with all other references, but I am still not sure that the definition of Compensation itself as it exists under the Plan (ignoring the final 415 amendment) includes the unused vacation pay that paid after participant terminates his employment.

Can somebody enlighten me?

#6 ERISAatty

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Posted 26 July 2010 - 12:13 PM

Treasury Regulation Section 26 CFR 31.3401(a)-1 specifically includes both “vacation allowances” and “dismissal payments.

#7 ERISAatty

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Posted 26 July 2010 - 12:19 PM

And, sure, the employer can change the definition of compensation prospectively, but isn't there an issue here - if they're trying to apply it to the individual now leaving the company - of amendment the plan to reduce an accrued benefit?

I'm working on a very similar issue now, and I'm trying to determine whether or not, in fact, *not* including unused vacation pay in the amount of "annual earnings", where the plan defintion of annual earnings is W-2 comp, (and doesn't mention excluding any W-2 amounts), is an impermissible reduction of accrued benefit. (Since references to any exclusions at all weren't added until years after the employee had reached the vested/accrued level under the DB plan.)

Would welcome any thoughts.

#8 Calavera

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Posted 26 July 2010 - 02:11 PM

Thanks. The "dismissal" payments will cover severance pay. "Vacation allowances" will cover a regular vacation pay but not an unused vacation pay. I found a nice series of articles published by the IRS in September 2004 as the Employee Plans Continuing Professional Education (CPE) Technical Instruction Program for Fiscal Year 2004. As their disclaimer said, "These materials were designed specifically for training purposes only. Under no circumstances should the contents of these articles be used or cited as authority for setting or sustaining a technical position.", but they pointed me in the right direction.

http://www.irs.gov/r...=133213,00.html

We amended the definition of compensation prospectively for anybody leaving company in 2 months and later. It will change the future rate of accrual but not current accrued benefits. The 204(h) notices were distributed at least 45 days before the effective date of the amendment. I believe the reduction of future accrued benefits is permissible as long as the 204(h) notice was provided timely.