Can deferrals be accepted by a plan after participant terminates emplo

[Alonzo]

I believe the IRS has made informal statements that you can't make 401(k) deferrals out of severance pay.

[John A]

Are there any instances where a 401(k) plan can accept deferrals after termination of employment? For example, if an employee terminates tomorrow, but receives their last paycheck 2 weeks from tomorrow, can a plan accept deferrals from that paycheck? Can a plan acceprt deferrals from late commissions paid after termination of employment? How about severance pay? Has this been discussed at any professional meetings?

[Jon Chambers]

I think this one is pretty clear. The compensation from which the deferral is deducted needs to be related to "service". So, if the comp is for the last paycheck, which trails the termination date, it relates to service, and can be deferred. If it is severance pay, or salary continuation, or LTD, for example, it can't be deferred.

As an aside, many companies automatically set the deferral percentage to zero at termination, to avoid impermissible contributions, and to avoid trailing contributions hitting the participant's account after the participant has already received a lump sum distribution (e.g., a sales professional receives trailing commission compensation several months after separation from service, and after the account has been distributed). If this trailing compensation were contributed to the plan, the plan would have to make a second distribution.