Last day rule

[Guest jim williams]

My issue is when is an employee considered terminated when applying a last-day requirement for matching contributions? For example, if there is a 401(k) plan with a plan year ending on 12/31 and a participant terminates on 12/20 ,and does not provide any further services beyond this date, but receives paid vacation time for the payroll ending 1/4 of the following year. Is this employee considered employed on 12/31?

[mbozek]

It depends on the conditions of the termintion. Was there a written termination or resignation by the employee? It is possible for the employee's last day of work to be 12/20 but then he/she could elect to take 2 weeks vacation and terminate on the last day of vacation. This is different from the employee terminating employment on 12/20 and then receiving a lump sum payment for two weeks vacation pay on on the next payroll date, 1/4. You need to discuss this issue with the employer and the payroll service provider to determine the procedure for paying vacation. You may find out there is no difference in procedures for employees who terminate employment and collect vacation pay.

[maverick]

For just this situation a lot of employers have written policies stating that vacation is paid as a lump sum on termination date, say 12/20/02. They do not allow employees to work through 12/20, then go on two weeks vacation, then terminate 1/3/03. Also impacts 2003 ADP/ACP tests, and eligibility for group health/dental insurance (some plans cover ee for entire month if ee works at least 1 day). Tom