Eligible employee

[Guest mparker2028]

I seem to remember this q on previous posts but couldn't find it.

Participant terminates from 3% SH 401k plan 12/27/2004.

Final paycheck (for services performed in 2004) is paid to him on 1/3/2005. This is not severance or vacation pay.

Is this participant eligible for a 3% safe harbor contribution for 2005 plan year?

Thank you

[Archimage]

Yes, since he would have received this compensation no matter if he terminated or not.

[rcline46]

And I would say no. At the time the check was received, there was no ee/er relationship and the employee was not eligible to defer (see the new final 401(k) regulations and use of compensation for updates). Because they were not an employee, they are not eligible for the Safe Harbor either.

[Beltane]

And I would say no. At the time the check was received, there was no ee/er relationship and the employee was not eligible to defer (see the new final 401(k) regulations and use of compensation for updates). Because they were not an employee, they are not eligible for the Safe Harbor either.

Rcline, are you suggesting this is always the case, even when we are not dealing with a year overlap? For instance, if [calendar year plan] an employee/contributor terminates 3/15/06, and receives the check or is paid on 3/17/06 that 401(k) should not be withheld from that last check??? Seems like that would be nearly impossible to enforce, especially if an outside payroll service is used.

[rcline46]

end of year crossover is a special case because the pay is on a different W-2. Within a year I have no problem counting hours and pay for services (but NOT severance pay). When pay is received in a different plan year it is a different story.

[Beltane]

end of year crossover is a special case because the pay is on a different W-2. Within a year I have no problem counting hours and pay for services (but NOT severance pay). When pay is received in a different plan year it is a different story.

I don't see the difference in the fact set if you cross into another year, since you have no ee/er relationship when the final check is received no matter what month we're talking about. If your plan definition of compensation for all purposes is W-2 comp [a safe harbor definition] [were not talking about severence pay here], you would have to consider that compensation for plan purposes. In the [basic] document we use, 401k amounts withheld are deducted from the 'Participant's Compensation', and this prototype has a determination letter. I make the argument that ignoring such compensation would be an operational failure for not following the terms of the plan....

I suspect your crossover issue is you have hours of service in one year, and compensation for such service in another. If there is no hours of service requirement for a benefit accrual in a plan year [401k, SH 3%, match, whatever], again, I don't see how that compensation can be ignored.

Thanks for posting by the way!

[rcline46]

Mr. Holland of the IRS has opined for years that this is the result in this situation. CHeck out the new final 401(k) regs and 415 regs for compensation. Of course you may not read them the same way I do. However, whenever I see 'may' in a sentence, I believe you can also use 'may not'. IE, 'may' does not mean 'must'. And so using any pay after termination is suspect, and if it interfers with the smooth and logical operation of a plan, I won't use it.

Others may disagree, but I don't see where the regs REQUIRE the usage, they only PERMIT the usage.

[Tom Poje]

I don't recall Mr. Holland's opinion being this.(or actually my 'feeble' recollection is that he was addressing a similar sounding issue - do you count this person in the ADP test in 2005. (or put another way, if the ee didn't defer, are you stuck with a big fat 0 in your ADP test for 2005.

1.401(k)-2(a)(4) deals with what deferrals to use in the test.

my copy of the regs (1.401(k)-2(a)(4)(B)(2)

says

"is attributable to services performed by the employee in the year and, for the employee's election to defer, would have been received by the employee within 2 1/2 months after the close of the plan year, but only if the plan provides for elective contributions that relate to compensation that would have been received AFTER THE CLOSE OF THE PLAN YEAR to be allocated to such prior year rather than the year in which compensation WOULD HAVE BEEN RECEIVED.

in other words, the comp (and any deferrals) still count. but do you test it in the year paid or in the prior year? The new regs are clear the plan must indicate (rather than the administrator make the decision).

I don't see how the safe harbor can be excluded for this person based on that.

so, ee gets the safe harbor, but in this example either 2004 or 2005.

[Archimage]

That is my understanding as well.

[Beltane]

This is a technical tip link from the 2002 ASPA [now ASPPA!] conference:

http://www.reish.com/practice_areas/Techni...s/IRStip122.cfm

However, for reasons already posted here, following this opinion puts us between a rock and a hard place.

[because one might not be following the terms of the plan if the final payroll is ignored for 401k purposes].

On one hand, I can understand ignoring the January payroll run for the ADP test, since you are to include only those eligible to defer. If they weren't employed in the second year [let's say 2002 to equate with the link above] they certainly would not be elgible to defer in 2002. However, if a plan defines compensation for benefit purposes as a Participant's W-2 comp, you would have to allow for the 401k deduction and deposit...one which is ignored in the ADP test.

Strange, unless I'm missing something which is very possible [feedback please...] - strange to have a 401k deduction made but excluded from the adp test [setting the otherwise excludable employee rule aside]...

Regarding Rcline's post...the new 401(k) regs are effective for plan years beginning on or after Jan 1, 2006, right? So are we dealing with an administrative change on this issue for post 2005 plan years?

[Beltane]

This is a technical tip link from the 2002 ASPA [now ASPPA!] conference:

http://www.reish.com/practice_areas/Techni...s/IRStip122.cfm

However, for reasons already posted here, following this opinion puts us between a rock and a hard place.

[because one might not be following the terms of the plan if the final payroll is ignored for 401k purposes].

On one hand, I can understand ignoring the January payroll run for the ADP test, since you are to include only those eligible to defer. If they weren't employed in the second year [let's say 2002 to equate with the link above] they certainly would not be elgible to defer in 2002. However, if a plan defines compensation for benefit purposes as a Participant's W-2 comp, you would have to allow for the 401k deduction and deposit...one which is ignored in the ADP test.

Strange, unless I'm missing something which is very possible [feedback please...] - strange to have a 401k deduction made but excluded from the adp test [setting the otherwise excludable employee rule aside]...

Regarding Rcline's post...the new 401(k) regs are effective for plan years beginning on or after Jan 1, 2006, right? So are we dealing with an administrative change on this issue for post 2005 plan years?

Sorry about the ADP reference above, I know this link started out as a Safe Harbor issue, but I believe the answer is also non Safe Harbor related.

[Tom Poje]

I'd still say something is left out of the argument.

Person quits late December, final paycheck is first week of January (that is simply a side effect of processing, we do not get paid every day)

Its argued the person performed no services in new year, therefore shouldn't have deferred (and also had no eligible comp)

Fine. now you have created a new problem. the person performed services at the end of the year, but you are ignoring that last week he worked. Why are you allowed to do that?

ERISA Outline Book is not 100% clear [ they start talking about severence pay and stuff], though 2005 edition says (11.47) there is a good argument that the payment should be eligble for deferrals. [also see 11.62)

it also adds, if you use the 403b proposed regs, deferrals made out of final paycheck would be acceptable because such an employee is treated as an active employee for the payperiod. not sure if the 2006 edition has anything new.

My interpretation of all that would be something like Plan year runs from 1/1 - 12/31

the corresponding compensation runs from 12/28 - 12/XX or whatever.