Supplemental Pay for Military Reservists under the new 415 Regulations

[Guest ToddieBear]

I'm a bit confused about whether/how the new Proposed 415 Regulations may affect supplemental payments made to military reservists called up to active duty.

Up to this point, I was under the impression that there was a bit of leeway for employers to either terminate the employment relationship or continue the relationship when the employee was called to active duty. Either way, the employer could pay supplemental pay to the soldier. If the employer relationship was terminated, no FICA/FUTA was due. On the other hand, if it was continued, FICA/FUTA was due, but salary could be reduced to make 401(k) contributions. The IRS never confirmed this interpretation, but I believe it is a fairly reasonable one.

Under the new Regulations, Section 1.415©-2(e)(1) says:

"(e) Timing rules.

(1) In general.

(i) Payment during the limitation year. Except as otherwise provided in this paragraph (e), in order to be taken into account for a limitation year, compensation within the meaning of section 415©(3) must be actually paid or made available to an employee (or, if earlier, includible in the gross income of the employee) within the limitation year. For this purpose, compensation is treated as paid on a date if it is actually paid on that date or it would have been paid on that date but for an election under section 401(k), 403(b), 408(k), 408(p)(2)(A)(i), 457(b), 132(f), or 125.

(ii) Payment prior to severance from employment. In order to be taken into account for a limitation year, compensation within the meaning of section 415©(3) must be paid or treated as paid to the employee (in accordance with the rules of paragraph (e)(1)(i) of this section) prior to severance from employment (within the meaning of section 401(k)(2)(B)(i)(I)) with the employer maintaining the plan. "

Section 1.415©-2(e)(4) says:

"(4) Certain military service. The rule of paragraph (e)(1)(ii) of this section does not apply to payments to an individual who does not currently perform services for the employer by reason of qualified military service (as that term is used in section 414(u)(1)) to the extent those payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the employer rather than entering qualified military service."

I am wondering what the impact of 1.415©-2(e)(4) is. Only employees can benefit under a plan, so the employer cannot make contributions or salary reduction contributions for the employee normally if such a relationship doesn't exist (other than in the same plan year). Does this only pertain to employer contributions (and possibly salary reduction contributions for the supplemental pay) for the plan year the employee enters active duty? Alternatively, is the IRS trying to permit all contributions after the person is no longer an employee?

Any help would be appreciated.