termination pay

[jpod]

Public school district will set up a 457(B) plan in 2002. Terminated employees receive accrued vacation and sick pay in a lump sum within days or possibly weeks after termination, not in final paycheck.

Question: Can 457(B) participant defer out of the termination pay? (Assume all other requirements and limitations of 457(B) will be met.)

Note that as a result of the Job Creation and Worker Assistance Act of 2002 technical corrections, the definition of "includible compensation" for purposes of Section 457(B) is the Section 415©(3) definition. Severance/termination pay clearly qualifies as 415©(3) compensation.

I am aware of the IRS' generally negative views about deferring into a 401(k) plan out of post-termination severance pay, but I don't see "active employment" as a requirement for 457(B) deferrals.

One difficulty may be that 457(B)(1) says that "only individuals who perform service for the employer may be participant." However, I don't see why this would preclude a deferral out of severance/termination pay, as long as the deferral election is made prior to termination date.

Any thoughts?

[jpod]

No takers on this one?

[mbozek]

Just saw this thread because I am in the process of updating my 457(B) plans for 2001 tax reform. Under recently issued IRS proposed regs vacation pay and sick pay can be contributed to a 457(B) plan provided that it is not otherwise made available to employee. I guess that an employer could provide that any vacation or sick pay accrued as of the date of termination will be contributed to a 457(B) Plan. Amounts deferred under a public employer 457 (B) plan can be rolled over to an IRA.

But there is an alternative for employers to contribute the vacation and sick pay to a qualified plan upon terminaton to avoid FICA tax. The employees can withdraw the funds after severance from service. See Thread under govt plans ('is this legal') for Fla county that has established such a plan.

Another question: can public school employees contribiute the vacation pay/sick pay to a 403(B) plan (max deferral of $15,000 in 2002)

[Guest S.Yahiro]

I don't have an answer to your question. Instead, I have a similar question.

Our 457 plan is a state government plan. Oftentimes, our terminated employees get their vacation pay-outs 3-6 months (and sometimes more) after they have terminated. Currently, if the employee signs a reduction agreement prior to terminating (indicating they want their vacation pay to be deferred to the 457 plan), we allow the deferral - even if the vacation pay is paid to the employee 3-6 months later.

Does anyone know if, based on the new regs, we can continue this practice?