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Terminated employee on severance


alexa

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We have an ex-Exec started severance in Feb 2020 for net 3 years(before my time). She is having Roth 401k deductions taken out of her ongoing severance pay. Is that ok?

It was my understanding our system is setup to stop 401k deferrals on severance pay and it seems to be for other employees. But perhaps since Roth is after-tax?

Thanks

Lexy

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The plan document almost certainly has the answer here. Many documents will say that compensation paid within a certain period after termination can be included for plan purposes, but often they'll say something like "but only to the extent the compensation would have been paid had the participant not had a severance from employment." You'll have to check yours for the answer.

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This is a pretty complex topic.   Is this severance or pay that is coming in after they terminated?   It matters a lot.    The simple example is if a person gets a commission or vacation time paid to them after they terminate most likely  (the specific facts and how the document is written will be critical in the final determination)  that is compensation they could defer upon.

If this is true severance pay- they are paying this person because they were terminated and the termination is what triggered being paid- it would seem like it is most likely they can't defer upon that compensation.  Once again you need to look hard at the specific facts and the document.  

The discussions of severance paid within a given time period tends to be mostly found in the 415 rules/parts of the plan document and be interpreted in that context.  

One thing you might want to check is if this pay is part of some non-qualified plan that pays out a deferred compensation over 3 years.   I have plenty of clients whose Stock Appreciation Rights (SARs) and other non-qualifed plans pay over a number of years after the person leaves the company.   That is not severance pay but often times excluded from the definition of compensation in the plan document. 

In short I think you need to ask more questions about what this pay is and then read the document very carefully to see if it addresses what this is.  

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Severance pay - we ended your job but will pay you $X per month (or whatever) over the next two years - is NEVER compensation for qualified plan purposes.

However, and maybe things have changed, I thought to be a bona fide severance plan you could not pay out over more than two years.

Seems to be a disconnect there - so maybe (although intended as such) this is not a true severance plan/benefit and these are considered deferred compensation payments rather than severance, in which case the 401(k) plan document should indeed describe the treatment of such.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Is this executive still an employee of the plan sponsor?  If no, then they would most likely not be eligible to contribute to the the plan and the definition of comp may end up being a moot point.  Is this individual still eligible for other employer sponsored benefits?  Complex topic.

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