457 plan and lump sum vacation leave

[Guest David G]

If a participant in a 457 plan receives a lump sum payment of vacation or sick leave upon termination of service, can that participant base a deferral on that compensation assuming an election was in effect prior to the payment? Does it matter if some of the leave was "earned" prior to the person electing to participate in the plan?

Would the answer be the same for a 401(k) plan?

[Guest David G]

Let me pose my earlier question somewhat differently. Does the salary deferral election made in a 457 plan apply to compensation earned after the election is made or compensation paid or made available after the election? In a 401k plan, the regs state that the election applies to compensation paid or made available after the election. The 403(B) regs used to say that the salary deferrral election of a 403(B) plan applied to compensation earned after the election was made. The Small Business Job Protection Act of 1996 apparently changed the 403(B) salary deferral election to function like a 401k election and now its election applies to compensation paid or made available. In contrast, the 457 statute merely states that compensation will be deferred for any calendar month only if an agreement providing for the deferral has been entered into before the beginning of such month. Any suggestions?

[Guest Brent Rowell]

Nothing definitive .....

I've seen and thought it was any compensation as long as agreement was from prior month or earlier.

I suppose an agreement could be drafted that specified what kind(s) of compensation should be used

------------------

Brent

[Guest David G]

Thanks for your input Carol. If the gossip is correct, then wouldn't that approach also apply to vacation leave taken in the normal course of employment to the extent that the leave being taken, accrued or was earned before the salary deferral election went into effect? Wouldn't this be an administrative headache for employers?

[This message has been edited by David G (edited 09-22-1999).]

[Carol V. Calhoun]

Haven't researched this one recently. But I seem to recall some gossip to the effect that the IRS has at least informally suggested that one cannot defer vacation or sick leave pay after such leave is "earned." Thus, suppose you had a carryover of vacation from year to year, with a cash-out upon termination of employment. Under this theory, a salary reduction agreement entered into in January of the year of termination of employment might be able to cover only vacation pay earned in the year of termination, not that carried over from prior years and paid out upon termination.

Anyone been following this enough to know whether this position has been codified or rejected at this point? Personally, I try to avoid citing gossip as authority when I can avoid it.

--------------------------------

Employee benefits legal resource site

[Carol V. Calhoun]

Yes, and yes. (Is that succinct enough? )

-------------------------------

Employee benefits legal resource site

[Guest David G]

Yes.