401k and match taken from last check in new year

[Guest lindamichals]

If an employee's last check is in the new plan year, but terminated last day of previous year (usually vacation pay) and there is 401k/match taken from that check, how is it to be treated in the new year? Is the 401k/match to be considered in the ADP/ACP testing for the new year? Too late to back and change the prior year obviously. This this is true, for you Relius users, how should an employee be coded, Terminated or Cont to Participate?

Much Thanks!

[Guest lindamichals]

I typed too fast, it should say, "if this is true"

[Mike Preston]

The governing rule for this sort of thing is in 1.401(k)-1(b)(4)(i) and (ii). Those sections basically state that the plan has flexibility in the way it treats the deferrals received from the first paycheck of the new year (and the corresponding match) when there are no services performed by the employee in the new year.

However, most plans do not provide clarity on this issue; or, if they do, they provide that the employee's compensation, deferrals and match are to be treated as taking place solely in the new year. That is certainly the administratively easiest thing to do, because then the W-2's will match with the ADP testing.

The concern is that an employee that has no employment relationship in the new year would have the deferral (and match) not counted at all in the new year's ADP/ACP tests. In order to avoid that result, the regs contemplate placing those monies into the prior year test if the plan drafters want to do that.

In practice, however, the lack of an employment relationship in the new year hasn't stopped the IRS from allowing those deferrals (and applicable matching contributions) to be counted in the ADP (ACP) test.

The bottom line is that you look to your document to see what it says.