Retired physician receiving compensation

[Guest JPIngold]

A physician in a practice retires in June, 2009. He had maxed out his 401(k) by 6/30/09 and retired with $100,000 in compensation. The practice is paying him as they collect his receivables and he gets paid another $100,000 in the last six months of 2009. The plan is a safe harbor 401(k) plan. Is his SHNEC 3% of $100,000 or 3% of $200,000?

I would argue that he earned the $100,000 of deferred compensation and it is compensation for hours worked and this is not "severance" pay.

[Jim Chad]

I would have thought that since he was not working any hours in the last 6 months, the second $100,000 could not be counted as comp.

[Guest JPIngold]

I guess my argument is that the hours he did work produced the receivables that are now being collected and paid out to him in the form of compensation. So, he is essentially just now being paid for those hours he worked prior to his "retirement".

[Guest Sieve]

I would agree. The 415 regs permit amounts paid after termination of employment, by the later of 2-1/2 months afterwards or the end of the plan year, to be considered participant compensation if the individual would have been entitled to the amounts had the employee not terminated. Certainly, the employee would have been entitled to the receivables had he not terminated employment

[J Simmons]

I agree with Larry.

[mbozek]

A physician in a practice retires in June, 2009. He had maxed out his 401(k) by 6/30/09 and retired with $100,000 in compensation. The practice is paying him as they collect his receivables and he gets paid another $100,000 in the last six months of 2009. The plan is a safe harbor 401(k) plan. Is his SHNEC 3% of $100,000 or 3% of $200,000?

I would argue that he earned the $100,000 of deferred compensation and it is compensation for hours worked and this is not "severance" pay.

How is the 100k being reported to the IRS? As W-2 income, a dividend or what?

If it is w-2 income is it excluded as comp under the plan because it paid after he has terminated?

[Guest JPIngold]

A physician in a practice retires in June, 2009. He had maxed out his 401(k) by 6/30/09 and retired with $100,000 in compensation. The practice is paying him as they collect his receivables and he gets paid another $100,000 in the last six months of 2009. The plan is a safe harbor 401(k) plan. Is his SHNEC 3% of $100,000 or 3% of $200,000?

I would argue that he earned the $100,000 of deferred compensation and it is compensation for hours worked and this is not "severance" pay.

How is the 100k being reported to the IRS? As W-2 income, a dividend or what?

If it is w-2 income is it excluded as comp under the plan because it paid after he has terminated?

It is W-2 income, along with his income from the first 6 months. Since it is not later than the end of the plan year in which he ceased employment, isn't it eligible comp based on the 415 regs referred to in the previous couple of posts?

[mbozek]

unless the plan document says otherwise it is eligible comp.

[Bill Presson]

I would agree. The 415 regs permit amounts paid after termination of employment, by the later of 2-1/2 months afterwards or the end of the plan year, to be considered participant compensation if the individual would have been entitled to the amounts had the employee not terminated. Certainly, the employee would have been entitled to the receivables had he not terminated employment

What about for 2010 if he had continuing receivables collection pay out?

[Guest Sieve]

If received after later of 2-1/2 months following termination or end of plan year, then it could not be comp. for plan purposes, even if he would have received the payments had he continued in employment. (Treas. Reg. Section 1.415©-2(e)(3).)

[david rigby]

No disagreement with conclusions, but there may be more to it. I think the 415 reg requires the plan to state what is included in compensation. Is the payment of these $ amounts as W-2 sufficient for that purpose?

This is my brief overview of relevant points from 1.415 reg. Valid?

• In general, “severance from employment” is considered a single event or date, and is not gradual or phased in.

• Certain types of compensation paid after an employee’s severance date can be included in a qualified plan’s definition of compensation, if paid within a specific limited time period.

• Certain other types of compensation paid after an employee’s severance date cannot be included in a qualified plan’s definition of compensation, even if paid during the limited time period applicable above.

• In order to include available amounts under the plan’s definition of compensation, the plan provision must state such inclusion, and the application of this definition must be non-discriminatory. If the plan provision is silent, then all compensation paid after a severance date is excluded.

[J Simmons]

No disagreement with conclusions, but there may be more to it. I think the 415 reg requires the plan to state what is included in compensation. Is the payment of these $ amounts as W-2 sufficient for that purpose?

This is my brief overview of relevant points from 1.415 reg. Valid?

• In general, "severance from employment" is considered a single event or date, and is not gradual or phased in.

• Certain types of compensation paid after an employee's severance date can be included in a qualified plan's definition of compensation, if paid within a specific limited time period.

• Certain other types of compensation paid after an employee's severance date cannot be included in a qualified plan's definition of compensation, even if paid during the limited time period applicable above.

• In order to include available amounts under the plan's definition of compensation, the plan provision must state such inclusion, and the application of this definition must be non-discriminatory. If the plan provision is silent, then all compensation paid after a severance date is excluded.

Hey, David,

It has been a while since I looked at the 415 regs, but that seems to comport with the lingering impressions that I have. It sounds like you have taken a more recent look. Do you think a plan provision that simply includes in the definition of compensation under the plan "pay for services rendered which would have been paid to the employee before a severance from employment if the employment had continued" would do the trick if paid by end of the plan year of termination or 2 1/2 months of severance from employment?

[david rigby]

Hey, David,

It has been a while since I looked at the 415 regs, but that seems to comport with the lingering impressions that I have. It sounds like you have taken a more recent look. Do you think a plan provision that simply includes in the definition of compensation under the plan "pay for services rendered which would have been paid to the employee before a severance from employment if the employment had continued" would do the trick if paid by end of the plan year of termination or 2 1/2 months of severance from employment?

Perhaps. The alternative, doing nothing, seems counter to the goal of covering the compensation. Although I haven't reviewed the preamble, it seems likely that this situation is a perfect example of what the IRS was trying to accomplish with the "end of plan year" provision.

[Guest Sieve]

David --

You are correct that this is, in the end, a plan document issue. Mandatory 415 reg amendment to plan would (or at least should) have addressed, among other things, whether to include post-termination compensation. Same for EGTRRA restatement--which should have a 415 amendment tacked on (or else the prior 415 amendment, by its terms, outlives the EGTRRA restatement, and is still in force).

[david rigby]

Sieve,

any comments on J Simmons' suggestion?

[Guest Sieve]

I believe that John's suggested language should include the timing element. (And, if you want it, you also should include language re: leave cash-outs.)

That being said, the IRS has not, to my knowledge, indicated whether a 414(s) definition of compensation can include amounts paid even beyond the 415 extended period following termination of employment. That's important because SH compensation is defined as 414(s) compensation. So, conceivably (although probably aggessivley), SH compensation could include those receivable amounts ad infinitum--but, of course, more often than not that would produce a 415 violation (if there were no compensation amounts paid within the 415 time limits and also during that limitation year) and would, to the same extent, produce a deduction problem (since no deduction can be taken for amounts exceeding Section 415).