Continue contributing after termination?

[Guest Giovanni]

There is an amployee who is being terminated this week. The Company has made an arrangement to continue paying this individual for 1 year. The Co. has a 401(k) Plan and this individual has been contributing. He would like the Co. to continue withholding 401(k) from his paychecks. Is this allowed? What are the pos and cons? Does it need to be spelled out in the severance agreement?

[actuarysmith]

Are they going to run him through the normal payroll (and issue a W2 at the end of the year?) or are they going to treat his wages as 1099?

[david rigby]

Most prior discussion threads about this topic have noted that such pay is (usually) termination pay, which is not wages, and therefore should not be covered by a qualified plan. However, you may wish to do your own search on the message boards (rather than rely on my memory).

[mbozek]

Need to review the termination/severance agreement to determine the terms for the payment. Sometime the payments will be designated as w-2 wages by the employer without any specifically designated job title for the employee. Also it is not uncommon for employers to settle discrimination claims by agreeing to pay back wages to an employee for a period of time to maximize benefits under qualified plans. Therefore you should consult with counsel as to whether the terms of the settlement would require contributions to be made.

[MWeddell]

I agree with Pax: search for prior threads on whether 401(k) contributions may be taken from severance pay. I know I've commented on this previously too.

[JanetM]

You should check the plan document also. Our plans specifically exclude severence pay.

[Guest RS Vatalaro]

I just returned from the AICPA benefits conference and a speaker specifically said (I don't have any cites) that if severance is for "services rendered" then you may withhold deferrals. If it is not for services rendered, you may not withhold. I agree w/ the other respondents that a review of the severance agreement and plan document is necessary.

[mbozek]

Isnt labeling severance paymentsfor "services rendered "an oxmoronic concept-- if some one is being paid on account of termination how can this be for performance of services? Unless the payment is for services to be rendered after leaving the job but before termination from the employer? Why not just pay the employee to perform service at home as an employee without any duties?

[Guest RS Vatalaro]

I see your point - however the speaker seemed to indicate that the IRS accepts that there are contractual ways to structure severance as being "for services rendered." Obviously these are informal comments and interpretations.

[mbozek]

RS: There are many ways to pay for services rendered-- such as retainer pay, provide unspecified consulting services, to advise the corporation on uncompleted/in process matters-- but this begs the issue of what is the difference between severance pay and payments for service rendered after termination which is included for benefit purposes.