Severance package to a terminated employee

[ratherbereading]

Participant term'd  December 2019.  The company wants to now give her a severance package of $30,000 and wants her to be able to defer from it.  My inclination is she cannot defer from it.  They want to instead now say it's a bonus, but I still say no based on this wording under Compensation: The payment would have been paid to the Participant prior to a severance from employment if the Participant had continued in employment with the Employer.    Which it would not have been.

[david rigby]

In case a reader is unsure about the above italicized reference, the OP is quoting IRS Reg. 1.415(e)-3(ii)(B).

I wonder what the Plan says.

[Larry Starr]

4 hours ago, ratherbereading said:

Participant term'd  December 2019.  The company wants to now give her a severance package of $30,000 and wants her to be able to defer from it.  My inclination is she cannot defer from it.  They want to instead now say it's a bonus, but I still say no based on this wording under Compensation: The payment would have been paid to the Participant prior to a severance from employment if the Participant had continued in employment with the Employer.    Which it would not have been.

It's a simple issue: is she EMPLOYED or not?  If she is no longer an employee, then she cannot defer.  If they have continued her employment (which it doesn't sound like is the case), then she can defer. They can call it whatever they want, but the issue is whether she is still an employee.

[ratherbereading]

14 hours ago, Larry Starr said:

It's a simple issue: is she EMPLOYED or not?  If she is no longer an employee, then she cannot defer.  If they have continued her employment (which it doesn't sound like is the case), then she can defer. They can call it whatever they want, but the issue is whether she is still an employee.

No, she's not. Thank you, Larry.

[ratherbereading]

16 hours ago, david rigby said:

In case a reader is unsure about the above italicized reference, the OP is quoting IRS Reg. 1.415(e)-3(ii)(B).

I wonder what the Plan says.

Actually, I am quoting the adoption agreement. 

[FPGuy]

Isn't the quoted language indirectly countenancing a bonus accrued during employment but paid following termination? Mr. Starr is a walking authority but if the money in question had been an accrued bonus would she not have been able to defer from it, assuming it would have otherwise qualified as compensation for deferral purposes per the Plan document? If so and the payment can be defended as an accrued bonus...

[Ellie Lowder]

FPGuy, she can defer from pay that would have been paid had she left or stayed, provided the amount is paid by the end of the year following the termination, or within 2 1/2 months, if later.  

[ratherbereading]

20 minutes ago, FPGuy said:

Isn't the quoted language indirectly countenancing a bonus accrued during employment but paid following termination? Mr. Starr is a walking authority but if the money in question had been an accrued bonus would she not have been able to defer from it, assuming it would have otherwise qualified as compensation for deferral purposes per the Plan document? If so and the payment can be defended as an accrued bonus...

It's not really a bonus, they just wanted to call it that.  It's a severance package given to her post-retirment, which she would not have received had she continued employment.

[Larry Starr]

2 hours ago, FPGuy said:

Isn't the quoted language indirectly countenancing a bonus accrued during employment but paid following termination? Mr. Starr is a walking authority but if the money in question had been an accrued bonus would she not have been able to defer from it, assuming it would have otherwise qualified as compensation for deferral purposes per the Plan document? If so and the payment can be defended as an accrued bonus...

But it ISN'T an accrued bonus; the original posting said this: "The company wants to now give her a severance package of $30,000 and wants her to be able to defer from it."  And if a deferral would to occur from a legitimately accrued bonus, then the deferral applies ONLY to the actual year of deferral.  While you relate back an accrued bonus (if you follow the specific rules), you cannot relate back to the prior year a deferral.

[Luke Bailey]

3 hours ago, Ellie Lowder said:

FPGuy, she can defer from pay that would have been paid had she left or stayed, provided the amount is paid by the end of the year following the termination, or within 2 1/2 months, if later.  

ratherbereading, what Ellie Lowder is pointing out is that money is fungible. If she has other amounts coming to her for work she did before termination, she may be able to defer from that and replace it with the $30k severance, from which she cannot defer.

[DiamondJim76]

We offer a severance plan (funded and audited) and you cannot defer.  We can take money out to pay 401(k) loans, but that's about it.  Like Luke said, we inform people about the severance well in advance so they can work out if they can put more into the 401(k) while working knowing that there will be a big chunk of money coming once they retire.  We also cash out Annual Leave which we CAN defer into a 401(k).