Post retirement contributions

[Guest Kolderhere]

I have a client in a school district that is being offered a choice of taking her severance pay as cash this year, depositing a portion (not to exceed MAC) this year and next year or waiting until next year to do either of those prceeding choices. I believe this constitutes an elective deferral and should not be allowed after this year. Am I wrong and what are the applicable code sections of 402(g) and 403(b) to cite?

[Guest Yanikoski]

You are correct. This may not be a problem if the severance pay is not too much -- i.e., within the normal elective deferral limits. If the severance is higher than that, though, contributions need to be made as EMPLOYER contributions. And any contributions made after the year of severance need to be employer contributions, because there is no longer any salary to defer.

But, as your question implies that you already know, an employer contribution cannot be an elective deferral. And if the employee is given a choice, then it IS an elective deferral as far as the IRS is concerned, whether the parties call it that or not. That means it will be an illegal contribution.

The usual way around this is to make such arrangements mandatory for all employees who are eligible for it. There may be state-level or union obstacles to this, however, and it may be considered to be a serious issue for employees who DON'T want their severance pay to go into their 403(b) account.

School districts should ALWAYS get expert advice before offering any kind of post-employment contributions.