Severance pay eligible for deferral?

[Guest Fred Reilly]

I have seen a number of opinions that severance pay is not eligible to be deferred, but no citation of authority. The posting titled "Is employee in the ADP test?" on March 17 indicates that it is not, or that it is not if paid after termination of service.

Is it the mere fact that it is severance pay that causes the problem or is it the fact that it is paid after termination? In the latter instance I think it is clear that a non-employee cannot defer. Would it make a difference if the severance is paid in the last check received on the last day of work?

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[KJohnson]

The issue is whether the individual is an employee.

The following question and answer are from the IRS Q&A session at the 1998 ASPA Annual Conference.....

Q. What is the IRS position on elective deferrals from certain payments following the termination of employment, such as severance pay and accumulated vacation pay?

IRS Response: We do not believe that deferrals can be made by someone who is not an active employee. If payments classified as above are paid PRIOR to the termination of employment, the participant can defer from those amounts (assuming the plan otherwise allows such elections). If the participant has separated from service and these amounts are paid at a later time or over a period of time, no deferrals may be made.

[This message has been edited by KJohnson (edited 03-20-2000).]