Deferral From Bonus Paid After Severance

[Guest CJK]

A terminated, retired employee is entitled to a "bonus" three months after the severance from employment date. The individual wantes to defer a portion of the "bonus" in accordance with the salary deferral election that was made when he was actually an employee. Can this be done?

[Alf]

Not on your facts. Only employees can defer under a 401(k) plan and only compensation paid to employees is eligible compensation under a 401(k) plan. The date that the employee stopped being a statutory employee is the key, not just whether compensation is reported on a W-2.

[KJohnson]

First, look at your Plan Document. If it doesn't allow the deferral then there is no quesiton. If you document does allow the deferral or if it is ambiguous, you may want to loot at this thread.

You may want to look at the following:

http://www.benefitslink.com/boards/index.php?showtopic=462

I think the IRS may have spoken informally on this more recently an an ASPA conference, but I don't have those Q&A's handy.

[Guest Harry O]

If you work your way through the definitions of "employee" and "participant" in the 401(k) and 410(B) regs, you'll find that only active employees can make deferrals. You can possibly construe an exception for certain "trailing" payments (e.g., accrued vacation) that may or may not apply to your "bonus". That said, I have received determination letters on plans that expressly allow deferrals of post-termination pay such as severance pay. Maybe your plan document can be interpreted to allow this type of deferral?

[MWeddell]

Here's another related thread that you may wish to read:

http://www.benefitslink.com/boards/index.php?showtopic=4792