Jump to content

Vacation Payouts


Guest Johnny

Recommended Posts

Does anyone know if vacation/sickday payouts at termination can be used for elective 403(B) or elective 457 deferrals?

I have a glossy brochure from one of the major fund managers suggesting that this is possible post SBJPA '96.

My recollection is that other interpretations were more restrictive...suggesting that it was only amounts earned for vacation and sicktime in the year of termination could be used.

And it's unclear to me right now how EGTRRA affects all of this.

Any ideas would be appreciated.

Thanks,

Johnny

Link to comment
Share on other sites

Guest Yanikoski

My understanding is that all compensation, even sick/vacation pay relating to prior years, is available for salary deferral. However, only sick/vacation pay that applies to the most recent full-year of service (for 403(B)) or to the current tax year (for 457) can be used in determining includible compensation for purposes of calculating the maximum permissible contribution.

Example for 403(B), which is the trickier case:

Full-time teacher earning $40,000/year retires at the end of June, and gets $25,000 in unused sick and vacation pay, of which $2,000 applies to the last 12 months. Her total compensation for the current TAX year is then $45,000: $20,000 in regular compensation for the six months she works in the current year, plus $25,000 in unused sick/vacation pay. Elective deferrals can, in principal, be taken against the entire $45,000, minus any other deductions from her paycheck, of course.

And also, of course, the salary deferrals may not exceed the limits for the plan she is in. In the 403(B) case, because includible compensation means the final full year of service, her includible comp for the current year is $42,000 -- $40,000 regular pay plus $2,000 in sick/vacation that applies to the last 12 months -- and minus any mandatory contributions to the public retirement system. It the latter amount is, say, $3500, her net includible comp would be $38,500, and that would be the maximum contribution under Section 415. Naturally, as far as elective deferrals go, she is subject to lower limits, and her deferral limit would probably be in the $11,000-15,000 range.

Link to comment
Share on other sites

Chuck,

I agree based on having just read the 1999 IRS 403(b)audit guidelines and the Committee Reports on Section 1450(a) of the 1996 Small Business Act .. both of which indicate that the defintion of compensation for 403(B) salary reductions was switched over to the same definition used for 401(k) plans.

The concept of includible compensation being a major limiting factor in calculating maximum contributions doesn't seem that relevant anymore post EGGTRA since we don't have to do the MEA (except for the catch up and some other extraordinary cases). Yes?

Thanks,

Johnny

Link to comment
Share on other sites

Guest Yanikoski

Generally speaking, 100% of includible comp is not going to be the limiting factor. But there are certainly some exceptions. For example:

1) A part-time employee who is a second earner in a two-income family may well want to contribute as much salary as possible to a tax-deferred plan. Such people often make less than $11,000, and so will hit the 100% limit before the other limits.

2) I know of one church organization that makes substantial employer contributions, and contacted me specifically about cases where the employer + employee contributions not only equal 100% of compensation, but actually exceed it (after age 50, the limit is $100% + $1000)! In churches this may not be that unusual, since salaries tend to be very low.

3) In cases where employers want to make post-retirement contributions -- especially if those contributions are in lieu of sick/vacation pay -- the 100% limit can often be the controlling item.

This is all so new, that it's hard to anticipate where all the exceptions are going to be. My position (which, as a software vendor, is somewhat biased) is: if you make simplifying assumptions (such as: we don't really have to worry about the 100% limit) you will get by with it most of the time, but once in a while you are going to get caught doing something wrong -- or maybe missing an opportunity to let people contribute more!

Link to comment
Share on other sites

Thanks Chuck ... quite excellent points ... sometime I would be interested in learning a little about the software that you provide.

Take Care,

Johnny

Link to comment
Share on other sites

  • 5 years later...
Guest Mpowers

For School Districts: Accumulated sick and vacation pay can turned into an employer 40b contribution, it can also be turned into an employer contribution into a medical trust plan.

Mark Powers

PRG

203-453-3151

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...