Contributions after severing employment

[waid10]

We have an employee that will be leaving our company on 12/31/04. As part of his severance package, he will be paid for the first 6 months of 2005. Since the individual will be paid for half of next year, can he contribute to the 403(b)? Is he eligible for the match?

Our match does not require employment on the last day of the plan year. However, it seems that he would not satisfy the service requirement of 1000 hours (even though he is being paid like a current employee) to qualify for the match.

Any thoughts?

Thanks.

[GBurns]

As far as the 1000 hours service requirement goes: What are you paying this employee for, if not for services rendered which according to most payrolls is time worked?

Will you be withholding income taxes and FICA? Will you be paying the employer matching FICA? If you are, What is the authority for doing so, Is it not that the payment was wages/compensation for services? If you are paying for services, Why would this service not meet the service requirement?

Why would this be treated differently to any other authorized paid leave of absence?

[No Name]

I disagree. The employee severed from service. The payment is for past performance of services, not current services rendered.

Whether the payment is subject to FICA, etc. is one for the CPAs here.

[Lori Friedman]

wade10, You mention your "company", so I'm assuming that you work for a 501©(3) organization and not for a public school system.

Here's something for you to consider. Does the severance package satisfy the definition of "bona fide" severance pay? If not, Sec. 457 will step in and tax the payments during the year when the employee ceases to perform services, not in the year when the actual payments are made.

[waid10]

Thanks for all of your responses. The severance agreement was signed at the end of June 2004 and provides that the employee will resign effective 12/31/04. He will receive an additional 6 months compensation (through 6/30/05) provided that the employee works a six months resignation notice (7/1/04 - 12/31/04) and meet certain performance objectives.

Does this effect your previous responses on whether he can participate in the 403(b) and receive the match?

[Alf]

Compensation paid to non-employees can't be deferred in a 403(b). You can't maintain a 403(b) for non-employees, so any compensation paid after 12/31 is ineligible for deferral.