Mandatory Discontinuance of 401(k) Deferrals

[Guest Ira Hayes]

I would appreciate a citation as to whether an employee on severance pay can continue making 401(k) deferrals.

Thanks,

[rcline46]

Sometimes you can use logic. Is the participant being paid? If yes, then deferrals are from pay. If no, then from where will the deferrals come? This is a Cash Or Deferred Arrangement (CODA), so deferrals cannot come from cash already in hand.

If paying off a loan, then yes, even if the loan was originally set up to be deducted from pay because the loan is a separate obligation.

[Guest mjb]

there are two separate issues involved here:

1. what does the plan provide about comp that is eligible for deferrals. Some plans expressly exclude severance pay, some do not.

2. what is the employee's status? If the employee has been terminated as a conditon to receiving severance pay he will not be eligible to participate in the plan. However, some employees receive terminal pay or salary while still employed but not performing any duties, e.g., employee will remain on the payroll for 1 year with full benefits but not come to work in order to satisy some contractual requirement. An employee could also be put on a paid leave of absence with full benefits as a form of severance pay for a specified period.

[Guest Harry O]

Note that the *proposed* section 415 regs would effectively preclude such deferrals.