Deferrals in Error from Post-Termination Comp.

[Guest Gumby]

Our 401k plan defines eligible Compensation as "salary actually paid" for a plan year. We have a situation where employees were terminated in the middle of a payroll period but were paid for the full payroll period. 401k deferrals were therefore applied to the entire payroll period payment rather than simply the portion of the period prior to termination.

I just became aware of this process. I'm concerned we've been allowing elective deferrals for the portion of the payroll period that occurred after termination. That looks to me essentially like post-termination severance compensation (ie, not for services performed prior to termination) and I read that as not covered by the Plan.

Is this a clear SCP (assuming the amounts involved are nominal since we're talking about deferrals relative to a 1-2 week period at most)? How far back do I have to look to see when this started?

[K2retire]

There is a lengthy discussion of this issue in a post by bg5150 with a subject line about the final paycheck crossing the plan year.

[Guest Sieve]

Gumby - Your issue is different from the prior topic K2 refers to. I think your issue is self-correctable. Just retain the inappropriate deferral from "severance" pay, and any appropriate match that went with it, as a credit in the plan for future employee deferrals/matches, and then return the deferral amount to the employee as compensation (after appropriate withholding). I would go back to the effective date of the final Section 415 regs (i.e., the first plan year beginning on or after 7/1/07).