Can payments made after termination of employment (severance, disabili

[EGB]

Can a plan subject severance and/or disability payments to a deferral election when such payments are made after the employee's termination date? The plan's definition of comp is 3401 such that these payments would clearly be included if made when the participant was an employee. The plan is unclear on whether they would be included if the payments were made when the participant was no longer an employee. I have always had the thought that, once an employee is terminated, there can be no further deferrals, even if the individual receives further payments (eg, severance or disability) after his termination of employment despite the fact that the payments are subject to withholding (in a plan that contains a 3401 definition of comp) since non-employees cannot participate in a 401(k) (or any plan for that matter). Any thoughts or experiences would be greatly appreciated.

[MWeddell]

IRS officials have consistently said that elective deferrals must come from compensation paid to an employee, so severance pay that continues to be made after an employee terminates employment (i.e. compensation paid to a former employee) should not be eligible for deferring into a 401(k) plan. Nonetheless, the situation has been left ambigious because it's never been addressed in an official manner such as in regulations or a revenue notice.

In the May 1999 American Bar Association meeting Q&A's, #11, the IRS noted that they are not vigorously pursuing enforcement of this policy. If a plan document specifically indicates that severance pay reportable on a Form W-2 is eligible for 401(k) elective deferrals, a plan sponsor should rely on that provision.

[KJohnson]

At the 1998 ASPA conference the IRS also said that you cannot defer from severance pay after termination but if you lump all severance pay into the last paycheck the IRS stated that you could defer (assuming the plan allows such an election).

If you go to 401(k) Q&A column in benefits link and look at Q&A 13 it also discusses this issue.

[Guest RW]

Any difference on this issue for a pension plan in which severance payments following termination of employment will be added to credited service for pension payments?