401(k) and pension

[Guest cgiebel]

Is it common practice to allow 401(k) deferrals to be taken on vacation payouts made at termination of employment? Can vacation payouts count towards final average pay and credited service in pension plans? If yes, what are the advantages and disadvantages?

[Harwood]

Regarding 401(k) deferrals: legally, it is OK to deduct from vacation and severance pay if paid on the last of employment [i.e. while still an employee]. Deferrals should not be taken from payments made post-employment.

Some companies, though, have policies where they don't take deferrals from final paychecks.

As always, it is important to have a written policy [hopefully publicized], administered in a non-discriminatory manner.

[jaemmons]

Whatever you call it, if it goes on the W-2 and the plan counts all w-2 wages then from an operational standpoint you would withhold the deferrals.

However, the employee can instruct the employer not to before the check is cut.

[Harwood]

Please see http://www.benefitslink.com/boards/index.php?showtopic=20450

By law, one must be an employee to have a 401(k) deferral. All W-2 wages may count towards plan compensation, but deferrals cannot legally be taken for those W-2 wages paid post-employment.

[Alf]

Are vacation payouts and severance really comparable when considering this issue? Vacation payouts really seem to be payment for past services as an employee and severance always seems to just be a form of payment for retraining, job hunting, releases from future suits, etc. rather than for past services. I understand and agree that the IRS informally advocates a "safe harbor" test of whether the amounts are paid on the last day of employment, but in theory, "forward looking" severance payments shouldn't be considered under any retirement plan regardless of when paid and vacation payouts that really are compensation for past services should be considered no matter when paid. My point (or question) is really that vacation payouts and severance probably should be analyzed differently, in theory at least, shouldn't they?

[Harwood]

A short piece:

http://www.reish.com/practice_areas/Techni...ips/IRStip1.cfm

A longer piece:

http://www.jenkens.com/jenkens/newsletters...IB/bib_v3i2.pdf

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