Fringe Benefit Payments and 403(b)contributions

[Guest Rookie]

I am working with a 403(B) plan for an employer who offers two fringe benefit programs. The programs pay out lump-sum benefits for vacation or sick days earned by the employee, but not utilized. The payments for the vacation days are available at retirement only; payments for the sick days are available at the end of the calendar year.

My question is this: can a participant in the employer's 403(B) plan elect to defer payment of a portion of these fringe benefit payments into his or her 403(B) plan, subject to thier existing 403(B) salary reduction election?

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AVS

[Guest JWBrown]

I don't have reference materials in front of me, but my recollection is that deferrals should only come out of the portion that's attributable to the current year accrual, regardless of when payouts of total accruals could or could not occur.

[Michael Devault]

Only those amounts that are earned in the most recent one year period of service may be added to includible compensation for purposes of calculating the Exclusion Allowance. The Exclusion Allowance is the IRS' formula for determining how much may be contributed to a TSA.

However, once the maximum is determined, the amounts to which you refer may be the subject of a salary reduction agreement, thus a source of funds for making the contribution.

Hope this helps!

[Guest Rookie]

Thank you for your posts. I think I am on the right track.

A post from "Ellie Lowder" on 6-30-1999 mentions legislation passed in 1996 which allows contributions to a 403(B) plan from checks which contain unused sick leave and unused vacation pay. Is anyone familiar with this legislation? Can someone give me a cite?

Thanks.

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AVS

[Michael Devault]

I suspect that Ellie is referring to the provision of the Small Business Job Protection Act of 1996 that permitted multiple salary reduction agreements under section 403(B). The Act section is 1450(a), which amended IRC section 402(e)(3).

Prior to this change in law, an employee could only enter into one salary reduction agreement per calendar year. From a practical standpoint, it kept an employee from using lump sum payments such as those you described as a source of TSA contributions. The use of multiple salary reduction agreements effectively solved this problem.

Hope this is of some benefit.

[Ellie Lowder]

Right, Michael. And that same section also changed the compensation to which a salary reduction agreement applies to coincide with the rules for 401(k) plans. Hence, while unused sick leave/vacation pay for years prior to the current one still can't be counted as includible compensation for the calculations, the salary reduction agreements can cause contributions to be taken from those checks (provided they are paid at the time of retirement, not deferred).