severance payment paid prior to termination of employment

[Guest rlt4]

The plan sponsor adopted the 415 amendment which excludes severance payments from definition of compensation. How should severance payments paid BEFORE termination of employment be treated? The employee signed a severance agreement and was supposed to be terminated on Jan 31, but his termination date was changed to Dec. 31. Meanwhile, his severance payment was paid in February, shortly after he signed the severance agreement. I think severance payments made purely on account of a termination of employment can still be included in plan compensation, so long as it is paid while the employee is an active employee. Any thoughts?

[MWeddell]

I agree, depending of course on what exactly your plan amendment says. Severance payments typically are excluded from plan compensation only if paid after one's employment has terminated.

[Guest Sieve]

If you are using a 415 definition for compensation (rather than using a W-2 or withholding definition), I think there may be an issue including as compensation a severance payment, even if paid before termination of employment, based on the language in the regs that compensation means "amounts received . . . for personal services actually rendered in the course of employment . . ." (Treas. Reg. Section 1.415©-2(b)(1).) How can an amount paid under a severance agreement be considered to be paid for services actually rendered during employment, when the agreement calls for the severance to be paid for other reasons?

[J Simmons]

Good point, Sieve. After all, severance payments are not paid for services, but to induce the employee to quit, to no longer provide services.

[Guest rlt4]

Thank you for your feedback. I apologize, but I should have provided mores specific facts in my original post. The Plan does use a W-2 definition of compensation and their good faith iterim amendment to comply with the final 415 regulations doesn't specifically exclude severance payments, but contains language about post-severance compensation. Specifically, it states:

"For Limitation Years beginning on or after July 1, 2007, compensation for a Limitation Year shall include compensation paid by the later of 2 1/2 months after an Employee's severance from employment with the Employer maintaing the Plan or the end of the Limitation Year that includes the date of the Employee's severance from employment with the Employer maintaining the Plan, if:

(i) the payment is regular compensation for services during the Employee's regular working, or compensation for services outside the Employee's regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments, and, absent a severance from employment, the payments would have been paid to the Employee while the Employee continued in employement with the Employer; or

(ii) the payment for unused accrued ona fide sick, vacation or other leave that the Employee would have been able to use if employment had continued; or

(iii) the payment is received by the Employee pursuant to a nonqualified unfunded deferred compensation Plan and would have been paid at the same time if employment had continued, but only to the extent includible in gross income.

Any payments not described above shall not be considered compensation if paid after severance from employment, even if they are paid by the later of 2 1/2 months after the date of severance from employment or the end of the Limitation Year that includes the date of severance from employment."

Based on the plan language, I think severance payments would only be excluded from compensation if it is paid after termination of employment, not before.

Any other/different thoughts? Thanks!