Compensation, Severance, and Unused Vacation Pay
Posted 03 June 2010 - 09:04 AM
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.
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?
Posted 03 June 2010 - 09:22 AM
Posted 03 June 2010 - 03:42 PM
In the final 415 regulations amendment, the Code §415(c)(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.
Posted 04 June 2010 - 06:22 AM
Posted 07 June 2010 - 10:38 AM
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?
Posted 26 July 2010 - 12:13 PM
Posted 26 July 2010 - 12:19 PM
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.
Posted 26 July 2010 - 02:11 PM
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.