severance pay

[K2retire]

I'm getting more confused the more I look for this answer. An employer is considering closing a division. If they decide to proceed, they expect to pay several months of severance pay to the impacted employees. This pay would be within the same plan year as the termination, but potentially more than 2 1/2 months after the termination date.

They have 2 questions:

1. Can they include the severance pay in plan compensation for purposes of deferrals and employer contributions?

2. If they include severance in plan compensation, are participants required to wait until after the severance has all been paid to take a distribution

Where I'm getting hung up is the part of the definition that says pay that would have been paid if the employee had continued to work for the employer. Does that include pay at the employee's usual base pay rate even though they are not performing any service, or is it intended to only refer to things like accumulated vacation pay, sick pay and pending commissions?

[Belgarath]

Based upon the information you are providing, this would appear to be severance pay and NOT included in 415 compensation. In other words, this is not accumulated pay for vacation or accumulated leave or something they would otherwise have received compensation for absent a termination of employment. They are eligible for it only if they terminate employment, and can't collect it any other way. You might want to take a look at 1.415©-2(e)(3) for more detail.

[masteff]

Don't confuse yourself by thinking of severance as a continuation of base pay, regardless of whether it's calculated as X weeks of pay.

[K2retire]

Don't confuse yourself by thinking of severance as a continuation of base pay, regardless of whether it's calculated as X weeks of pay.

That is exactly where I was getting hung up!