Can Employee Defer 100% of Severance into 403(b) Plan

[mal]

I don't regularly work with 403(b) plans, but came across a situation facing a client....

Teacher is getting ready to retire and district will purchase 25% of unused

sick leave. He would like to defer this payment into his 403(b) annuity. (He

is absolutely positive that it will not force him over the deferral limits.)

My reading of the regs suggests this is not possible. Under 1.403(b)-1(b)(3) an employee is only allowed to enter into a single deferral agreement per year. In this person's case, he defers roughly 10% of his salary. My take is that the final

severance payment would be subject to the same 10% deferral already in place.

Am I correct???

[Guest Yanikoski]

The one-salary-deferral-agreement-per-year rule has not been in effect for quite a few years now. So a new agreement can be put in place.

However, your client needs to be aware that the sick leave itself is NOT includible compensation when determining the contribution limit -- only the part applicable to the last full year of service may be applied in determining the limit. However, assuming your client is still correct about not going over the limit, the sick leave pay itself can be used to help fund whatever deferrals he/she is eligible for.

[E as in ERISA]

See pages 10 and 34 on how the proposed 415 regulations would treat severance for 403(b) deferral purposes.

http://benefitslink.com/taxregs/13024104.pdf