Retirement incentive payment

[Guest michaelb]

A municipal government is offering a one time retirement incentive payment of $500 per year of service provided the employee irrevocably elects to retire by June 30th. The payment will be made within 30 days following the termination of employment. This is a one time opportunity that must be elected within a six week window and employees have had no right to such payment until this year and will have no such right in the future.

We are trying to determine whether the retirement incentive can be deferred under the city's 457(b) plan. It has been suggested that it cannot be deferred because it is being paid after the termination of employment. Although Treas. Reg. 1.457-4(d) addresses sick, vacation and back pay and requires they be made available before termination in order to be deferred, this payment is none of those.

The "can't defer amounts paid following termination" rule seems troubling because it would mean employees could never defer anything from their final paycheck because it is always paid after employment is terminated.

If anyone can help me understand why the incentive payments could not be deferred it will be much appreciated.