Post-severance compensation and deferrals

[Guest tmills]

As we know the 415 regs require the inclusion of compensation paid after severance in the definition of compensation if it is paid by the later of 2.5 months after severance or the end of the plan year of severance, and it is regular pay earned before severance. As such, it can also be deferrred on. Ths issue is if the payment (and deferral) occur after the end of the year but within the 2.5 month window, in what limitation year are they included? A large consulting firm recently put out a release with the following example.

EE terms on 12/31/08, receives final paycheck for vacation, etc. in 1/09 (no actual date given.)

Deferrals taken from the final check (and a matching contribution made.)

The example then says the compensation, deferral, and match are all counted in the 2008 limitation year because of the regs. They go on to say that this rule can complicate year end testing and tracking compensation for employees who are later rehired in the year of the final paycheck. Not to mention bringing a '09 deferral into '08 could cause a 402(g) violation.

I have read the regs many times (especially 1.415©-2(e)(3)) and can sort of see why they say what they do, but I don't see it as clearly as they make it sound. However, if we assume that the payment is made later than the first few weeks of '09, their assertion is not logical, primarily for the reasons they cite as complications. I'm not sure the first few week thing applies anyway.

I'm curious what others think about this.

[Guest Sieve]

I haven't read much in the way of secondary sources regarding the final Section 415 regulations, but I disagree with the large consulting firm's conclusion that any post-severance compensation paid in another year must still be take into account in the ADP test for the year of termination of employment. I think they are flat-out wrong (unless I'm really missing something). The general rule in the regs, which has always been the case (at least in my recollection), is that Section 415 compensation is included in the limitation year in which it is paid or made available. (Reg. Section 1.415©-2(e)(1)(i).) That rule is not changed by the reg you reference. That particular reg (the one you reference) says that, for post-severance compensation, certain specific requirements must be met or else the payment is not considered compensation in "a" limitation year (i.e., it cannot be considered compensation in ANY limitation year). But, if the payment meets the post-severance compensation payment rules of the regs, then it will, in fact, be considered compensation in "a" limitation year--i.e., the limitation year in which it is paid (which, in this case, is also the limitation year in which it is made available). Nowhere do the regs say that post-severance payments are included as compensation in the year of termination of employment, nor do they otherwise indicate that the long-standing general rule is changed in the case of properly-paid post severance compensation. So, the general rule stands, and the reg you reference does not change it. That's my humble opinion, & I'm sticking with it!

[Guest tmills]

Thanks for the response, and I don't disagree. Here is a link to the report that started all this so readers can see for themselves.

http://www.lkravitz.com/pubsarticles/docum...ation-Final.pdf

[Guest Sieve]

I would call them on the phone and ask for the authority for their conclusion in the last paragraph on page 2. By the way, Tripodi is at first non-commital--pages 11.50 to 51--but seems to fall on the side of NOT counting post-severance compensation paid in the following year as compensation in the year of termination (page 11.93), which is also what you & I (but apparently not Kravitz) think. Let us know what Kravitz says.