Pay while on military leave

[Guest JBeck]

If a participant continues to receive compensation while on military leave, can the participant continue to elect deferrals to teh 401(k) plan during such time? I was told that the compensation while on military leave is taxable on form 1099-R, so I am wondering what plan compensation could be used?

[MGB]

There is a ruling from the 60s that resulted in this gross up not being compensation for SS purposes. That is why it is now on a 1099.

Of course, that means that it is also not compensation for deferral purposes and the person cannot participate while on active duty.

Some companies have ignored all this and say they are still employed and take out SS taxes (and allow them to stay in the plan). Military rights' groups have been contacting these individuals through media campaigns pushing them to go back and file for a refund of the SS taxes withheld.

Some companies are oblivious to the deferral issue and continue to incorrectly keep them in the plan, while correctly giving them a 1099.

The IRS was asked last year to reverse their position so that these people could stay in plans. They hemmed and hawed and are still "looking into it".

Meanwhile, legislation has been introduced to make them eligible for plans. Of course, that leaves the past open to problems if it is a prospective application. (It may still be in the hands of staffers and not actually introduced yet.)

[Harwood]

"Expanding" on what MGB wrote:

Supplemental military pay while employee is on temporary Reserve duty is treated as normal W-2 wages.

Active duty means the person is no longer an employee. Any supplemental military payments over $600 go on a 1099-MISC with no withholdings.

If the employer allows an active duty employee to continue to participant in benefit plans, the IRS may contend that the person is still employed and therefore should have W-2 wages. This is the problem area.

Look for Revenue Rulings 69-136 and 68-238 at http://www.taxlinks.com/rulings/findinglist/revrulmaster.htm

[mbozek]

The 69 ruling deals with payments to a former employee for FICA purposes. Why can't the employee be placed on a paid leave of absence in order to continue participation in the plans like any other employee on paid leave?

[Harwood]

The leave-of-absence solution sounds reasonable, if it meets the company's criteria of what a leave-of-absence is.

Normally when one is on a paid leave of absence, one does not have another full-time employer [in this case the U.S. military].