What does "last day employment" mean?

[Guest CharlieLaur]

Has there ever been any guidance (formal or informal) from the IRS on what it means to be employed on the "last day" of the plan year?

EXAMPLES:

Employee terminates employment on 12/30/2004. Plan sponsor is closed on 12/31 since New Years Day falls on a Saturday. Is employee considered to be employed on the last day of the PYE 12/31/2004?

Employee's last day of work is on Friday, July 29th. Plan sponsor is closed on Saturdays & Sundays. Is employee considered to be employed on the last day of the PYE 7/31/2005?

Employee's last day of work is on Wednesday, 2/23/2005 and is paid two weeks of vacation pay on his last day of work. Is employee considered to be employed on the last day of the PYE 2/28/2005?

Should the plan document address this issue?

If the plan document does not define the term "employed on the last day of the plan year", what guidance is there?

What are you doing in situations like this?

Thanks for all feedback, opinions, conjectures, etc...

[Guest CharlieLaur]

I am very surprised at the lack of responses on this issue -- it would seem to be an issue where everyone should have an "opinion" even if it is without factual basis.

Would anyone like to comment on how they handle the definition of "employment on the last day of the plan year" even if you are not sure that it is the correct methodology?

All responses greatly appreciated!!!

[Bird]

I thought I remembered some responses - maybe it was a similar thread.

Anyway, if they are at work on the last business day of the year, or gettting paid for vacation time, they're employed on the last day of the year in my book.

[david rigby]

There have been many discussion threads that speak to this topic, so the Search feature may prove useful.

IMHO, the answer should be one of practicality, with an eye toward the "big picture", and remembering the general ERISA principle of resolving ambiguities in favor of the participant. Precedent may also be useful.

Here is one example that happened to me. Long ago (I won't tell you when), I started a new job on the first day of January. It was a Monday, either the 2nd or the 3rd. The PS plan had a one year waiting period. Next January 1, was I eligible to participate? The answer was determined by looking at my pay; the employer did not prorate my monthly salary for that first month, so they considered that I had begun work on January 1, and met the one-year requirement.

Should the plan document address this? Maybe, but it seems more appropriate to include in the written procedures adopted by the administrative committee.

[GBurns]

I did not respond because I thought that the answers were self evident.

Minute details and odd ball situations cannot be addressed in a PD because not every situation can be predicted or even imagined. The same applies to the Administrative procedures.

In Example 1 New Years day is the next PY. New Years Eve however is within the PY but is no diffferent from any other holiday or weekend. Examples 1 and 2 have the same situation. If the employees in these examples are not considered employed on New Years Eve and on weekends for purposes of the PYE then they would not be considered employed on weekends during the year and would therefore have a termination every Friday with a re-hire every Monday. That is not done because the employees are considered to be still employed just not at work. Just like they are not at work at lunch time but are still employees.

An employee on paid vacation is still employed. That is why the employee is still covered under the health insurance, FMLA etc etc.

"Actively at work" would be a different issue.

[mbozek]

Termination of employment is not regulated by the by the IRS or plan because it is a matter of contract between the employer and employee as to when employment terminates. The agreement can be terminated immediately, e.g, when employee says I am quitting today. Some employees notify the employer of their last day of work and then take their vacation time before they terminate if the employer's policy permits. The determination of when employment terminates for retirement plan purposes is dependent upon the customs and practices of the employer regarding the termination of the relationship, e.g., when worker's comp coverage, health care, disability, etc. ends or when one party ends the realtionship, -"your fired".

[E as in ERISA]

The one fact situation that I might question is the person who terminates on 2/23 and is paid for two weeks vacation. I think that some (many? most?) employers would consider 2/23 the term date.

[GBurns]

I do not think that either the Gen Liability or the WC carriers would accept that as term date and I have not seen UC accept it either.

[E as in ERISA]

But I think that what is given to TPAs as "term date" is last day of service. I don't know that anyone is applying general liability, worker's comp or unemployment comp rules for retirement plan purposes.

[Effen]

That is the point, maybe they should.

I think Bird said it best, if they are entitled to payment, then they are probably still employed.

[GBurns]

They might not be applying it for retirement plan purposes but they had better have consistency across the Board in the event of litigation regarding the retirement plan or otherwise. And they better have legality in all issues.

In any case isn't there a difference between "term date" "last date of service" "last date of employment" and "last date actively employed" which could all be different dates?

[E as in ERISA]

What is it that requires consistency across the board for all purposes? A worker's comp examiner is not going to allow you to use the IRS' rules on independent contractor v. employee if that produces a better result for the employer. They are going to use their state rules, which can be different.

If someone has their last day at the job on Friday July 1, 2005, and they have two weeks of vacation accrued for which they get paid, I think that the payment is treated similar to a severance payment. It is something that is getting paid to them in cash based on not only their service but also due to the fact that they are terminating.

Otherwise, if you count their last day as two weeks later, do you now pay them an extra day because there was a holiday on July 4? If employees accrue vacation pro rata every two weeks, does the person get another 6 hours of vacation for that two week period?

Also, if a plan had a year of service requirement and a person who started on December 26, 2003 and had their last day at the job December 31, 2004, with one week of accrued vacation, then would they enter the plan on January 1, 2005?

[Blinky the 3-eyed Fish]

I am of the same opinion as Katherine.

[GBurns]

WC that covers an IC or sub contractor is covering an IC or subcontractor and not an employee. Even for WC an employee is an employee and an IC is an IC. WC covers either but the classification needs to be correct and consistent.

If the counting of days for vacation excludes July 4 or any public holiday, then it is not counted and the employee gets another day. This occurs very often in plans that count vacation by the days.

Yes, they would enter the Plan on January 1, but in practice would not be able to do so for a number of reasons or if they did would not accrue any benefits. Not actively at work, no forms, no earnings for deferral, not enough hours etc etc.

[Effen]

FWIW, we have Plans that count "severance" as service for benefits. If a person terminates July 1, with severance through 12/31, they consider him "active" on 12/31 for benefits. This is they way the document is worded.

Maybe, like most things, it comes down to the document. A well-drafted plan will address these issues; a poorly drafted plan creates problems. There are many acceptable answers and practices, but constancy and defensibility is key.

On a side note, I think some “TPA’s” can take too much responsibility for these types of decisions. Make sure whatever you do is ultimately the Plan Administrators decision and should involve legal counsel. You don’t want to be getting sued later if the DOL rules against a decision “you” made. CYA!

[E as in ERISA]

My point on independent contractors v. employee is that IRS rules and WC or UC rules are not always consistent. A person could be considered an employee for WC purposes but still be classified as an independent contractor for IRS rules. (If someone who is hired as an independent contractor to mow the lawn for a business hurts himself on the job, the WC examiner might come in and say he meets their 4-prong test for an employee because the individual used the company's lawn mower and require the company to pay. But that doesn't mean that he has to be put in the retirement plan the next day under the IRS' 21-prong test for independent contractor v. employee).

In regard to the question of the employee whose last day on the job is December 31 and has a week of vacation: it seems like you're being inconsistent in saying that his last day is now January 7 (if you add the one week to his last day) or January 10 (if he gets paid for a January 3 holiday) but then saying that he doesn't have hours, earnings or forms. What about the vacation hours you say you're using to move his term date out? The earnings for those hours that he's getting paid? Under your theory, shouldn't someone give him the necessary forms?

What I'm saying is that I not aware of anything that would require vacation paid at termination to be used to extend his term date for purposes of the last day rule. But I don't see how you're extending his term date but then not acknowledging the hours or earnings.

[mbozek]

The determination of when termination occurs for benefit purposes is dependent upon the customs and practices of the employer which in turn will be influenced by termination of other benefits rights, e.g., wc, health care etc, because the employer is not going to publish a definition of when termination occurs.

If an employee resigns effective Dec 30th, the employment realtionship ends on that date and the employee will not be employed on Dec 31 or be eligible for holiday pay for Jan 1 even if there is accumulated vacation pay due the employee. If the employee turns in a resignation on Dec 30th to be effective in two weeks after taking vacation the individual will be considered employed until Jan 13th.

A plan can count a period during which an employee receives severance pay for benefits purposes but is not required to do so.