Severance pay

[Guest RJF]

I tried searching this. Under final regs, does anything change with the following. Participant leaves company(not voluntary) and is given severence pay for the remaining year. In other words is not performing services and really isn't earned compensation. Can this person continue to make 401(k) contributions from this pay?

Thanks

[rcline46]

Read then new 415 Regulations, it is specifically addressed in there. However, only an EMPLOYEE can make deferrals. If there is no ee/er relationship, it does not matter what income the person receives or how it is paid. It is a violation of the exclusive benefit rule to let a non-employee contribute to the plan.

[MWeddell]

The 415 regulations are still proposed, not final.

Under current law, while the IRS and most practitioners believe the best practice is to not take deferrals from compensation paid after an employee's last hour of service is earned, the IRS also has grudgingly said it won't challenge taking deferrals from severance pay if it is expressly authorized by the plan document and the document has a current favorable determination letter.

Consider searching for "severance" in the 401(k) plans forum and I'm sure you'll find many prior discussions of this topic.

[Kirk Maldonado]

I would make a small change to MWeddell's wording, which I think is what was meant:

most practitioners believe the best practice is to not take deferrals from compensation paid after [the paycheck covering] an employee's last hour of service.

Thus, the "severance" pay need not be made on the employee's last day of employment, if it is paid to him or her no later than the date on which he or she receives the last paycheck.

[Guest RJF]

How about same scenerio, but regarding the allocation of employer contributions. Such as Safe Harbor and Profit Sharing allocations. Do you allocate with or without regards to severence pay?.

[Guest mjb]

When is the employee considered to be severed from employment by the employer? According to the proposed regs comp must be paid prior to severance from employment with the employer. If the employer agrees to continue paying the employee regular compensation in return for the employee not coming to work is that severance or compensation? What about employees subject to collective bargaining agreements, (e.g., professional athletes who are told to stay home for the rest of the season until they can be traded and must continue to particpate in benefit plans)? Employers frequently agree to pay compensation to employees to stay away from the workplace as part of a settlement for discrimination suits or executive buyouts under confidential agreements that are not communicated to HR/ benefit adimistrators. The agreement usually provides that the employee will continue to receive all employee benefits including pensions and health ins. for a stipulated period. I dont know how this arrangement will be treated under 409A (eg. is it terminal leave for an employee or deferred compensation ). Other options for continuing employment could include having the employee prepare a report or be available for consultation while working from home and remaining on the payroll. Given the fluidity of employment arrangments in todays market what is the difference in this case from an employee who is getting paid for working from home? In other words isnt this 415 compensaton issue just a matter of drafting the correct language for a separation agreement which will remain a confidential document?