HCE Determination - "Compensation" for Rehired Employee

[Übernerd]

Odd situation. Employee (Bob) terminates employment with Employer and begins taking distribution of a large benefit from Employer's nonqualified (stock unit) plan. That benefit is in 10 annual installments. If counted, each such installment is over the HCE comp threshold. Should those payments be counted when Bob is rehired to determine whether he's an HCE? If so, when? The question is crucial for Bob because Employer's qualified plan excludes all HCEs.

The qualified plan's definition of compensation for HCE determinations is--by cross-reference to § 1.415©-2(d)(4)--wages reported in Box 1 of W-2 that are "compensation to an employee by his employer." (Are payments to Bob from the nonqualified plan payments from Employer, for this purpose?) Per the 415 final regs, post-severance payments are excluded from this comp definition. (Are the installments "post-severance" even after Bob is rehired? Do the payments from the nonqualified plan count in determining whether Bob is an HCE his first year he's back? The next? Ever?)

I'm sure there's a rifle-shot answer to this that I'm not seeing. Thanks for any thoughts.

[ETA Consulting LLC]

Off the bat, severance compensation is not included within 415 Compensation. In your instance, it appears as if this represents an amount (or amounts) that would not have been received had the participant continued employment with the employer. If that is the case, and the only reason the individual received those amounts was because he severed employment, then they should not be included in the analysis.

That's the best I could surmise with the fact pattern.

Good Luck!

[Mike Preston]

But the regs do seem to be silent on treatment of payments that continue notwithstanding RE-employment. This is one for the proverbial ERISA counsel. Nonetheless, I woruld think ETK has it right.

[Übernerd]

I am the proverbial ERISA counsel! But this is a new one on us. I also tend to agree. Thanks, guys.

[ETA Consulting LLC]

I think the major determinant is the fact that the individual would have not received these payments had he not terminated. Also, they are not tied (at least directly) to services actually being performed by the employee.

There is (arguably) a chinese wall between pay for services rendered and pay pursuant to a contractual obligation.

Just some additional thoughts.

Good Luck!

[Übernerd]

Thanks again!