Last Day Rule

[commishvp]

Plan has a last day rule; participant terminates employment on 12/29/06 (last day of the plan year). Do they get a profit sharing contribution? I seem to remember it being a gray area and am not sure if there is any specific guidance.

Thanks for your help.

[JanetM]

12/29/06 was the last normal work day for an employee with standard monday to friday week. If this is 24/7 type of operation - the test would be if this was the last day of the week based on the employee's normal work schedule. If this is the case the employee is employed on the last day of the year and does get the ps contribution.

[Belgarath]

I'm not sure I agree. I see nothing in 1.410(b)-6(f) which requires this interpretation. If the employer/employee relationship is officially severed as of 12-29, then I think the employee can be cinsidered an excludable employee. I'm also not aware of any other official guidance which requires the "last work day" interpretation. Janet, do you have a citation?

[JanetM]

I don't have a cite. There was a thread but I can't find it. What I do have it Q&A from coverage & nondisrimination answer book.

TREATISE, COVERAGE-NONDISCRIMINATION-ANSWER-BOOK, Q 6:38.1 A plan has a last day provision. An employee quits on December 30. December 31 is a Saturday and the office is closed. Should this employee receive a contribution and therefore be considered benefiting?

A plan has a last day provision. An employee quits on December 30. December 31 is a Saturday and the office is closed. Should this employee receive a contribution and therefore be considered benefiting?

What is really being asked here is "What does it mean for an employee to be employed on the last day of a plan year?" Consider the following examples:

1. 7/31/2005 falls on a Sunday. If an employee's last day of work was on 7/29/2005 and the plan sponsor is closed on Saturday & Sunday, would the employee be considered to be employed on the last day of the plan year ending 7/31/2005?

2. Employee terminates employment on 2/23/2005 and is paid two weeks unused vacation pay on his last day of work. Would this employee be considered to be employed on the last day of the plan year ending 2/28/2005?

3. Following a hectic tax season, a CPA firm closes from April 16th through May 5th. An employee works on 4/15 but does not return to work when the company re-opens in May. Would this employee be considered to be employed on the last day of the plan year ending 4/30/2005?

4. 12/31/2004 was New Year's Eve and many businesses were closed that day since January 1st was a Saturday. If an employee's last day of work was on 12/30/2004, would the employee be considered to be employed on the last day of the plan year ending 12/31/2004?

These questions were answered by an IRS representative in the following manner at the fall 2005 ASPPA Conference:

"Being 'employed' on the last day of the year is not the same as working on the last day of the year. Employment is a 'relationship' with the employer. If you are on vacation and someone asks you where you work, if you are still 'employed,' you have an answer, even though you are not actually working during the vacation period.

"So, if 12/31 is a Sunday and it is a business that is only open Monday to Friday, unless someone has been terminated from employment as of that day, they are still employed even though it is not a work day.

"So, your example 1: as long as the person wasn't terminated, he is still employed on 7/31 even though it's a Sunday and not a work day.

Example 2

Employee is terminated prior to the last day; he is not employed on the last day regardless of how much money he is being paid upon termination. He is no longer employed by the firm as of 2/23.

Example 3

The question is always 'is he employed' during that period, not 'is he working.' (BTW, seasonal employee rules were never issued, so let's not deal with 'seasonal employees' here --besides, I don't think a three week shut down qualifies as 'seasonal'). Let's just assume that everyone is on vacation. Are they fired (terminated) on 4/16? Unlikely. They are basically on a company wide vacation; they are still employees; they are supposed to come back on 5/5. Therefore, they are still employed as of 4/30.

Example 4

Basically the same as opening comment about 12/31. Here, the company is closed 12/31 and last day of work was 12/30. None of that matters; what matters is 'was he still employed on 12/31,' and the answer is yes (unless he was actually terminated on 12/30)." (IRS Q and A #32, Fall 2005 ASPPA Annual Conference)

As with any comments by IRS officials, such comments carry the following caveat:

The answers reflected in this presentation are the ASPPA representatives' interpretation of the IRS officials' responses, and not direct quotes. They are intended to reflect as accurately as possible the statements made by the government representatives. This material does not represent the official position of the Internal Revenue Service, the Treasury Department, or any other government agency; nor has it been reviewed or approved by the Service or Treasury.

[rcline46]

As is usual with the IRS, they DID NOT ANSWER THE QUESTIONS!

If an employee is FIRED, then that date is is clearly the end of employment regardless of benefits such as sick time, vacation time, severance paid after that date.

What the IRS failed to address is the question of what if someone announces that the last working day of the year will be last day they work for the employer. If the last day of the year is a holiday, and they receive payment for that day, then I would clearly say they are employed.

Now if the employee says 'I will not return to work in January' I would argue they are employed Dec 31. Is 'my last day will be Dec. xx' translate to the previous statement? The IRS did not answer the question.

Is 'I quit' equivalent to 'you're fired'? The IRS doesn't have a clue.

Therefore, administrative firms have their own policy - some keep them in, others leave them out. What does your software do? If you don't know, try it.

I have never heard one way or another on any audited plan that the IRS has taken a position.

[Belgarath]

If an employer sends us certified census that lists a termination date of 12/29, we don't question it, and the participant is treated as excludable. Our valuation system just uses what we input.

[JanetM]

Belgarath, that is why the folks my office, we are plan sponsor - check on all those folks with year end term dates to ensure what gets into record keeping system is correct. We do change dates if the situation warrants it.

[Belgarath]

Interesting. Well, I guess I'll stick with the old "if it ain't broke, don't fix it" approach!

TGIF!!! This business really stinks this time of year...

[Guest mjb]

The IRS has no authority to determine when an employment relationship begins or ends because that is a matter of contract law not tax law. Most employment relationships are at will, i.e., the employee can terminate at any time without notice to the employer. If an employee resigns, quits or is fired on the last workday of the year e.g., Dec 29, then the employment relationship ends that day, not on the next work day unless the employer agrees to delay termination to a later day. An employee can delay termination by taking terminal leave, e.g. stop working on Dec 11 and take three weeks vacation which can include weekends if the employer's practice permits so that termination occurs on January 1. Severance pay is paid after termination of employment because it is paid to employees who are no longer employed. An employer can continue an employment relationship by paying a salary to an employee who has no work assignment or duties, such as being directed to stay home or by paying an employee who is on an authorized paid leave.