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Compensation after termination


Vlad401k

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Let's say a participant terminates in December of 2017. However, he has a final paycheck payable in the first few weeks of 2018 for services performed in 2017. The plan document states that the compensation paid during the first few weeks of the next plan year is excluded. So, would that final paycheck be excluded from both 2017 and 2018 compensation for testing purposes? If so, what if the participant deferred something from that paycheck. Would that deferral be excluded for testing purposes as well?

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Vlad, could you please clarify what you mean by "the compensation paid during the first few weeks of the next plan year is excluded"? I think you mean "excluded from compensation for the current year [2017 in this example]", not necessarily "excluded from compensation entirely". Our document has a separate item in the AA for including/excluding post-severance comp.

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Was this post severance comp? 

Or was this money paid in 2018 because that is how the last payroll period in 2017 fell?  If it was that then I think it is 2018 compensation and the deferrals were good and you test it in 2018. 

Or was this say vacation pay and other items cashed out? 

Or was this some kind of severance pay?

I would add I once had a plan that excluded all pay in the subsequent year even if it was like my first example and we determined that a safe harbor definition of comp and in theory had to test via 414(s) test.  It was just this plan had 10ks of employees and this was never more then 100 to 200 people so no on believed it would ever fail that test so it was never done. 

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ESOP Guy,

 

Let's say it's a check for regular pay. It's not for severance or vacation pay.

 

 duckthing,

 

The plan document has an option to include or exclude the compensation paid in the first few weeks of the following limitation year. My understanding is that if the final paycheck (for example, for work done in 2017) is made during the first few weeks of the following year (let's say 2018 is when the check is paid), then it can either be included in 2017 pay or excluded. My understanding is that it cannot count for 2018 (unless it's for vacation pay). Would you agree?

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It is included in one year or the other, but you do have to be consistent.

e.g. if you have 2 people in the same boat and one deferred and the other didn't, you can't "I will count the no deferral in 2017 cuz he was a zero anyway, but I will count the deferral guy in 2018 because that helps the test.

 

the FT William document uses this description

15. Post Year End Compensation

[ ] Determine Compensation using Post Year End Compensation

NOTE: If selected, amounts earned during the current year and paid during the first few weeks of the next year will be included in current year Compensation.

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I am replying to your duckthing question below even though it isn't directed towards me.

I guess I would have to read that provision carefully. 

What I can tell you is back when I did balance forward PSPs and now with ESOPs that would be 2018 compensation for every plan I can think of . 

In fact if the person was over NRA and the plan didn't require retirees to work 1,000 hours and be active on the last day of the plan year we would give such people a 2018 PSP or ER discretionary contribution in the ESOP.  I see that all the time in my job.  A retiree gets a small cont in the year after they termed if they termed during the last week of the prior year. 

I know way back when I did 4k plans (all balance forward) I would see these small checks hit in the following year (2018 in this case) with a small amount of deferrals.   We always treated them as comp and deferrals in the year they were paid not earned- ie 2018. 

I agree a plan can be written such that is income in the year worked (2017 in this case) but you can always count it as comp in the year it is taxable per the law has always been my understanding.  And most people I know think it is a pain to have the census comp to not match up with the W-2s for any given year.  So I can't recall the last time I saw someone who treated this as 2017 comp. 

Most plans I have seen over the decades starts the definition of comp as either gross comp or W-2 comp.  If it is W-2 comp as the starting point I don't see how it can be anything other then 2018 comp unless it then specifically says in this case to push it back to the prior year.  But that seems like a mistake waiting to happen.   It will always be easiest to have your plan comp starting point to match the sum of the employer's W-2s as that is easy to reconcile to. .  Even gross comp was treated as when paid for that definition.  But you could go back to the year earned but once again that meant the census didn't match the payroll system so I know of no one who does that.  In that regard I agree with Tom you can pick one or the other but you do have to pick. 

 

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The Compensation earned through regular working service would be included as eligible compensation under section 415. 

The FT Williams document question seems to be an accrued earnings question with regard to a specific year for all employees, not just separated employees.  As indicated, it would need to be consistently applied to all employees across all years it applies.

For most plans I've seen, a regular check, for service paid in "arrears" due to timesheet submission timing & approval before payroll processing would be included in 2018 W-2 and 2018 eligible earnings.  If the eligible 'post severance' earnings are excluded by the plan, it would seem 414S testing would need to pass.

ERPA

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  • 11 months later...

Good afternoon to all,

I am chiming in here because I am researching this subject and have some issues with what we have (or haven't) been doing in the past because we simply didn't know.

Our document (Datair) has check boxes for including or excluding "amounts paid during the first few weeks of the next Limitation Year (Plan Provision on the 2007 Defined Contribution Plan Interim Amendment)" and we always check the box that says to include this compensation.  We haven't really focused much on this, until now.

Today I am working on a plan where a participant terminated 12/08/2017.  He is reported on the census for 2018 as having -0- hours, yet drew compensation of $11,718.00.  Of course first I will check with the employer to be sure he wasn't rehired and actually did work some in 2018.  But if this really is 2017 compensation and we should have been calculating his match and his profit sharing contributions based on a salary that was higher by this much, for 2017, oh my.  Or on the other hand, maybe he is due those missed contributions in 2018?  

The article ugueth posted is somewhat helpful, once I digest it.  

Any helpful hints will be appreciated.  Thanks!

 

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in 2009 at the ASPPA Conference (Q and A #s 48 - 53)the IRS response to a number of questions was:

1 of 6. An employee terminates in December 2009. A final payment of salary due for services is made in January 2010. The plan does not use the “first few weeks” rule in the IRC §415 regulations to treat the January payment as made in 2009. The plan year is the calendar year. The plan includes a section 401(k) arrangement that defines compensation eligible for deferral to be section 415 compensation. Is the individual included in the 2010 ADP test, even though he terminated employment in the 2009 plan year

Yes. Since he could defer out of the compensation paid in January 2010, he is an eligible employee under the 401(k) arrangement for the 2010 plan year. The 401(k) regulations do not treat active and former employees differently

 

2 of 6. Suppose instead that the plan uses the “first few weeks” rule. Is the individual now excluded from the 2010 ADP test because he is not an eligible employee for the 2010 plan year?

 

Yes. All of his compensation paid in 2010 relates to the 2009 plan year. When performing the 2009 ADP test, the deferral percentage will reflect any elective deferrals made by this individual from the 2010 compensation and the amount of the 2010 compensation.

 

3 of 6. Suppose instead that the plan is a safe harbor plan that provides the safe harbor nonelective contribution. Is this individual entitled to that contribution?

Yes. Since, as discussed in Q-1, the individual is treated as an eligible employee for 2010, he is entitled to a safe harbor contribution. However, if this individual is an HCE, and the plan does not provide the safe harbor contribution to HCEs, then no safe harbor contribution is made on his behalf. The same answer would apply to a safe harbor match if the individual made elective deferrals out of the 2010 compensation

 

4 of 6. Suppose instead that the plan provides that an employee may not defer out of any compensation paid after severance from employment. How does this affect the answer?

Now the individual is not treated as an eligible employee for the 2010 plan year, so is disregarded from the 2010 ADP test. The same is true if the plan provides that an employee may defer out of post-severance compensation only if it is paid in the same plan year in which the severance date falls

5 of 6. Would a plan described in #4 above be using a “reasonable definition” for defining compensation for deferral purposes?

Yes.

6 of 6. Suppose in Q-3 that additional nonelective employer contributions are made to the plan, but this individual does not receive an allocation of such contributions for the 2010 plan year because the plan allocates such contributions only to employees who are employed by the employer as of the last day of the plan year. To use cross-testing to demonstrate the employer nonelective contributions are nondiscriminatory, would the individual described

in Q-3 have to meet the gateway contribution test if he is a nonhighly compensated employee

Yes.

 

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Here are the further details of my case:

This plan document was written by an attorney and is one of the few not in our own Datair document.  The attorney chose to include post severance pay in the adoption agreement and the basic plan document calls for inclusion of the "first few weeks" pay.

The participant with the $11,718 payment in 2018 was not a rehire and did not work any hours in 2018.  This money was paid to him partly for unused vacation hours and partly as his year end bonus for 2017.  He got the check 02/08/2018, within the 2.5 month period.  He received a 2018 W-2 form for this money.

It seems that we should have asked the client for information about any trailing 2017 payments for people who terminated near the end of the year in 2017, but we didn't.  We calculated his 2017 discretionary match based on 2017 wages that were understated by $11,718, even though those wages matched his 2017 W-2.

My thinking is that we will calculate the extra amount he is due, deposit it now, and move on.  BUT

Here's the important part. Our documents that we write all have the box checked saying that we will include the "first few weeks" payments from the following year.  So as we do the 2018 annual reports, we have to be alert for terminated participants who left in December of 2018 and ask the client if there were trailing payments that dribbled over into 2019.

Then, when we ask for the census information for 2019 and years going forward, we need a blurb in the instructions asking for information on this type of payment.

Does this sound reasonable?

Thank you!

 

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as I recall the big problem is that documents simply say "the first few weeks" and make no distinction between active and terminated ees (and the documents are based on whatever in the regs)

so I think the IRS said if you include the last paycheck (paid in January) on one ee you do it for all. ugh ugh ugh ugh 50 gazillion times over! that is crazy

 

but I could be wrong...

.......

by the way, I have seen some say the person worked no hours in the new year so I don't have to consider the comp. this makes no sense. that is like saying "If you were fool enough the include the first few weeks then yes you have to consider the comp in the prior year. but if you don't then you never have to consider the comp. even the first point of the Q and A indicates an IRS opinion to that.

 

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Tom, I thought about what you are saying about all employees versus just the terminated.  Indeed, this particular client said that the check for everybody for hours worked from 12/15 to 12/31 always hits in January of the following year.  Those wages do not show up on the W-2 for the year they were earned.  They are reported on the following year's W-2, the year in which they are actually paid and received by the participant.

We don't have the manpower to undo/redo/recreate everything we've ever done, so I am trying to find a reasonable balance here.  My thinking was that the compensation for the participants who are still employed will continue to be based on each year's W-2 wages, Box 1 with add-back of pre-tax withholdings, just as specified in the document and just as we have always done things.  For the terminated, however, who left in  November and December, we can ask the client if there is a trailing check for eligible compensation dribbling over into January-February, and if so, we can add it into compensation reported to us.

Our plans are small and in most cases it won't amount to more than 1-5 people.  It should be feasible.

And then when the new restatement cycle cranks up in 2020, I am going to recommend that we NOT include the "first few weeks" anymore.

 

 

 

 

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I would guess some folks treat that rule as only applying to terminees and I imagine even the IRS wouldn't push it....

I suspect one reason for wanting to treat terminees is to get their last contribution in and get them paid out, if, for instance, safe harbor is paid once a year, then they would have the ridiculous small safe harbor contribution hanging around, but otherwise I can't imagine why you would want to use the first few weeks option.

 

good luck

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