Terminated Employee???

[nancy]

If an employees terminates service as of 7/31/02 but continues to receive a W-2 for deferred compensation for several years, is he/she eligble to defer into the 401(k). There are actually no services being performed. Also, if they attain age 70 1/2 should mininum distributions begin?

[rcline46]

You have answered your own question. If there are no services being performed, then there is no employee/employer relationship. Therefore the person is NOT an employee. Also read the definition of compensation in the document - I would be it refers to services rendered in some fashion.

If not an employee, then they are terminated and treated as any other terminated employee.

[JanetM]

Look in plan doc and see what the definition of comp is, our plan specifically excludes severance.

[david rigby]

Many plan definitions of comp do not include any reference to "services performed". It could refer to "compensation actually paid to the employee by the employer". This type of reference tends to steer one in the direction of the W-2. However, the original post stated "terminates service". That may or may not mean "terminates employment". Need more information on particular facts and circumstances.

There are probably thousands of employers who include the owner's spouse on the payroll, perhaps in some trivial amount. These spouses may never perform services that are related to the business. They still get a W-2.

Final question about 70-1/2. This depends on two things: is the employee an HCE? if so, yes the payments must commence under 70-1/2 rules; if not, what does the plan say about NHCEs at 70-1/2?

[E as in ERISA]

My understanding is that, if the plan allows it, 401(k) deferrals may be taken out of severance paid at or soon after termination of employment. (Most employees get their last check after their termination date). However, if the severance is paid over a period of time, then 401(k) deferrals cannot be taken out.

[nancy]

This is a consultant who is retiring. He/she is not an HCE and will be drawing deferred compensation for 5 years (in effect a buyout of accounts) and will receive a W-2.

[doombuggy]

I agree with Katherine. As for the 70 1/2 RMD, unless the rules have changed, a terminated employee needs to be taking the RMD. It's the active/non-5% owners who have a choice.

[Guest asire2002]

Maybe the consultant shouldn't be receiving a W-2 but a 1099 of some form, in which case he/she wouldn't be considered an employee. I realize that's not your question, but . . .

[Earl]

.... and sell him a DB Plan.