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Post-Severance Pay Correction


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We have two employees who retired in December 2020.  Shortly before their retirement, their pay rate was adjusted retroactive to JUNE, 2020 but the compensation is only being paid to them now, in late March/early April.  This is after the 2 1/2 months referred to in the regs.

  • The payment is regular compensation for services performed during their normal working hours and in all respects meets the definition of compensation under our plan,
  • The payment would have been paid to the employees prior to their severance from employment if the employees had continued working, BUT
  • The payment is not being made by "the later of 2½ months after severance from employment or the end of the limitation year that includes the date of severance from employment with the employer maintaining the plan."  Our limitation year is the calendar year.

I believe this means that the employer cannot make corrective contributions to their accounts to reflect the retroactive pay change.  For the sake of equity, we would probably make a compensatory payment outside the plan but I think the participants would prefer a contribution.

Any thoughts, anyone?

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What sort of contribution(s) - 401k, match, PS - and what sort of dollar amounts? If retired and not working elsewhere, I assume they would have deductible IRA availability, so paying out side the plan but encouraging IRA contribution could get them where they would have been. Likely already rolled - or will roll - distribution to IRA so no need to establish one just for this extra nub.

If plan had the flexibility and these were NHCEs, then possibly doing an extra PS contribution for them for 2020 would work.

You asked for thoughts - those are mine. 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Cash balance plan (employer investment management) with additional defined contributions to a participant-managed investment account.  Both based on a percentage of compensation.  No participant contributions.  Don't know the dollar amounts yet but these are not highly-compensated people and the amounts are not likely to be large from an employer perspective, and definitely want to do the right thing for them.  

 

Wish I knew why it took until now to decide they were underpaid or their jobs were mis-classified or whatever happened.

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  • 2 weeks later...

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