Vacation Pay as DC Contribution

[Guest blackacre]

In PLR 200301143, the Service approved a plan provision that allowed employees to elect to have vacation pay, which otherwise would be forfeited by year's end, contributed to the DC plan. The Service characterized the contribution as a non-elective employer contribution and not a CODA. If a plan does not have a use it or lose it feature, as long as the employee is not able to receive the value of the unused vacation pay in cash, that is, the vacation time can be used, can be carried over to the next year (perhaps with some limits on carry over), or can be contributed to the DC plan, do you think there might be a problem or is this essentially the same as the situation in the PLR? Any other thoughts or cautions? I'm aware of the non-discrimination concern. Thank you very much.

[Guest blackacre]

Update to my earlier post. I have received the plan and the desciption of its provisions was not correct. The plan does not have a forfeiture provision but it does allow for the conversion of unused vacation time to a cash payment that an employee can elect to receive in lieu of the unused vacation time. So, I'm thinking that the election to use vacation pay as a non-elective employer contribution won't be possible. Is there any impediment to having the options in the Plan to (i) use vacation, (ii) carry over unused vacation, (iii) cash out the vacation, or (iv) elect to have the vacation pay be an employee 401(k) contribution? It may be that some employees at the contribution limit will be unable to elect the last option, but many would be able to contribute.

[GBurns]

I think that the problem is the "cash out". As long as there is the option of getting cash or some other taxable item it most likely will not be ragarded as non-elective and be taxable income.

[Guest blackacre]

Thanks for your response. Yes, I agree. I wasn't clear enough, I guess. It there is an option to get a cash out of vacation time, then it can't be a non-elective employer contribution. After getting that information, I thought that it could be an elective employee contribution to the extent that the employee is not at the deferral limit. That's the current question.