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bona fide severance or vacation plans - attempting to avoid Section 45


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I have someone who has proposed to offer a benefit whereby employees will receive 1 month of paid "end of year" leave upon retirement (or separation from service) for every year of service they accrue. This arrangement will cover employees of a tax-exempt organization and is intended to fall outside of the strictures of 457 (and 457(f)) by being deemed a severance or vacation plan. In light of PLR 199903032, I do not believe this arrangement would be considered a severance plan because payments are made "when" an employee terminates versus "because" an employee terminates. However, could this be considered a bona fide vacation plan (that is, perhaps under an argument that a year of service gets you a month of "sabbatical leave" or reward vacation time once you terminate)? There does not appear to be much authority out there vis-a-vis bona fide vacation plans. Thanks for your help!!!!

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  • 3 weeks later...

I have not come across any authority on this issue. However, given the degree to which the IRS is scrutinizing purported welfare plans to determine whether they are really deferred compensation plans within the meaning of 457, I suspect that it would not look favorably on a "vacation" plan in which vacation could not be taken currently, but only upon termination of employment.

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