Severance pay

[Guest tonjer]

I know this has been addressed on multiple other threads however.... I would like some clarification on a few issues.

What are the cites for not including severance payments in a former employee's compensation for purposes of determining benefits in a DB plan? I understand that severance is paid to a former employee, etc., but is there an IRS cite or other authority?

Along the same line, Labor Reg. 2530.200b-2 provides that an employee is credited with an hour of service for each hour in which the employee is entitled to payment on account of a period of time during which no duties are performed (irrespective of whether the employee has terminated employment), then provides a laundry list of instances. Because severance pay is not listed, I take that to mean an employee may not be credited with service for hours associated with severance pay?

[401 Chaos]

Wanted to bump this up and ask a similar question. I am assuming that this is a dumb question but I do not work with defined benefit arrangements very often and so wanted to make sure I was not assuming away some possible creative approach or interpretation of a plan provision. Situation is as follows;

Employer has defined benefit plan with language that defines "hour of service" using language in 2530.202b-2, including description that an hour of service may include each hour for which an employee is paid, or entitled to payment, including certain periods during which no duties are performed.

Employer has high ranking HCE that it desires to terminate. HCE currently has 29 years of service. Plan provides much more generous benefit to early retirees with 30 years of service. HCE will get generous severance benefits equal to about 1 year of salary. HCE will also provide some additional transition support and guidance to employer (not totally a fiction) but original plan was to have HCE do this as a consultant or independent contractor and sever the employment relationship.

HCE has a large number of accrued vacation and sick leave days to which he will get paid but those don't come close to getting him enough "hours" for one more year of service.

Is there any argument that severance pay following termination of employment could count toward Hours / Years of Service in this case so HCE would get to 30 Years of Service. That just seems completely discriminatory and abusive to me. This is not a window program with broader availability, etc.--it's all about trying to provide greater severance / retirement benefits to one HCE than he would receive under terms of the plan as generally applied.

Other alternatives--could we argue that the individual was on a paid leave of absence when we know intent is that he will never routine for employment.

Do they keep him on as an employee for certain transition period during which he would provide some periodic assistance at a lower level and perhaps lower rate of pay but would not really be actively working the same way--i.e., he would not be coming in every day but also wouldn't be expected to completely disappear from the scene either.

Any thoughts or assistance would be greatly appreciated. I cannot seem to find any prior threads that discuss this particular issue in detail.

[401 Chaos]

I am hoping if I rephrase and add a bit more specific information it might generate some discussion.

The Plan provides that an "Hour of Service" inclues each hour for which an Employee is paid or entitled to payment, for the performance of duties of the Employer and "each hour for which an Employee is paid by the Employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity, layoff, jury duty, military duty or leave of absence" (up to a maximum of 501 hours).

Plan provides that an Employee shall be credited with 45 Hours of Service for each week in which the Employee actually works for an hour or more for the Employer. (The 45 Hours per week crediting provision appears to only apply to hours actively worked with credit for vacation or PTO credited as actual hours.)

The departing HCE here needs 1,000 Hours of Service in 2008 to get to 30 Years of Service. By my count, that would require him to generally work / accrue hours up until the first week of June 2008 (i.e., 23 weeks). Individual, however, has 46 days (414 hours) of accrued vacation and PTO. As a result, it seems to me if the individual works at least one hour during the first 14 weeks of 2008 (i.e., up until March 31st), he could then essentially stop active employment and use the remaining accrued PTO and get to the 1,000 Hours of Service mark.

Both company and individual contemplate individual will continue providing some services to employer but on a much reduced basis from past levels. That is to say, he will be doing substantive work representing the employer and transitioning his projects but probably nowhere near previous full-time work. The actual hours will likely vary a good bit from week to week but should require at least 1 hour per week over next several weeks.

Given the plan language and the fact the individual will continue to perform some services for employee, it would seem to me that the company could safely classify and consider the individual an employee through March 31st for purposes of getting credit for active employment under the Plan.

My question or concern is whether the fact that the individual may not be providing full-time service a potential risk or concern here or are there other possible problems with say using the accrued PTO for credit in these sorts of situations. How much scrutiny do these sorts of arrangements get and doesnt the plan language provide significant flexibility for such things. Many thanks.