Severance Pay

[k man]

There seems to be alot of confusion on this issue. does anyone know how to deal with severance pay and its affect on vesting and hours of service? our plan document seems to be silent on the issue except for a statement that severance pay after separation from service is not included in compensation. basically, our client terminated several employees and paid them six months of severance pay (payable each payroll period). They allowed the employees to defer a portion of this into the 401(k) and they would like to know if they should receive credit for these hours of service for the severance period.

It is my feeling that they should not have been permitted to defer of this money. in addition, i believe they should not receive credit for hours of service. does anyone know the answer to this?

[BFree]

I thought you received an hour of service when you WORKED an hour, not when you were paid for an hour.

[pmacduff]

Found this through a search of Benefits Link & thought maybe it would help. (it's in Adobe format).

[k man]

thanks. it seems to me the article suggests that the employee would not receive credit for time not actually worked for vesting and accrual of contributions

[pmacduff]

I agree. At an administration firm I used to work for; we had a client whose accountant actually convinced them to return a month's worth of deferrals that were made on behalf of a former employee from her severance pay. The former employee wanted the deferrals taken and specifically asked the employer to withhold so it was a bit of an issue to the participant to receive those deferrals back. In this day where the government supposedly wants each person to have the opportunity to save as much as possible for retirement, I would think that someone would raise and support this issue of deferrals from severance, even thought it may not be "earned" income. I don't think that revisions to most plan document/provisions would be that difficult. Just my opinion.

[k man]

based on that article and another source i am going to suggest the same thing as the accountant - that the deferrals be returned.

[Brian Gallagher]

from the pension answer book (2001) 25:2

With respect to severance pay...IRS representatives have opined that elective contributions can be made only by an active employee. Consequently, if such payments are available prior to termination of employment, a participant can make a cash-or-deferred election if the plan so permits; but, if the participant has terminated employment and such payments are made thereafter, the election cannot be made.

[QDROphile]

Is the question about service or contributions/deferrals? If you are looking at service, you must look at ERISA regulation 2530.200b-2. You can get into situations where additional hours are credited. I am not saying that this is one of them. We don't have enough facts.

[k man]

i feel comfortable that there is no service as defined by the DOL regs. clearly you cannot defer money when you are not an employee. although there is no definitive authority on this i believe the safer way is to exclude the severance accross the board.

[RTK]

Ditto on what QDROphile said. The issue of deferrals is different than the issue of service credit. Note that the general rule under 2530.200b-2 cited can require credit for "each hour for which an employee is paid, or entitled to payment, by the employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship as terminated) due to ..."