Termination Prior to Entry Date, but Compensation after Entry Date

[kevind2010]

I have a situation where a couple of employees terminated 2-3 days prior to their actual entry date. The plan defines compensation to include post-severance compensation. These employees' final paycheck was paid after what would have been their entry date. Since the pay date fell after their entry date, the client withheld 401(k) on the final paychecks from these employees either because the employee made an affirmative election, or they did not opt out of their auto enroll. Was the client wrong for doing this? (i.e., would these be considered ineligible deferrals?).

[My 2 cents]

Not a 401(k) practitioner, but doesn't the plan require that the person be in employment on the entry date? If so, a normal interpretation of the plan would have resulted in the now former employees not becoming participants. My vote (based on what I would expect the plan to say) is that there should not have been anything withheld since they never became participants. Of course,it always does come down to "what does the plan say?", doesn't it?

[ESOP Guy]

I am with My 2 Cents. Most plans will say you have to be employed on the entry date to enter the plan. It isn't a compensation question but an entry date question you need to be answering.

[Tom Poje]

I don't believe a problem exists. I believe most plan documents default to include paycheck paid in the first few weeks (and that isn't even considered severance)

I think the problem exists in the 'thinking process'

Let's say document says W-2 comp is used.

you quit Dec 28, 2014 but that week's paycheck shows up in the following year - 2015.

Now, when you file your 2014 taxes do you include that paycheck? No, that paycheck is counted in 2015 for tax purposes. so I don't see why the plan should be treated any differently.

so even though the plan year runs 1/1/2014 - 12/31/2014 the compensation runs from, let's say 12/27/2013 - 12/25/2014. so the person's term date fell within the 'comp year' not the plan year.

if we were smart we would have a nice 364 day calendar (52 weeks of 7 days)

and one 'free day' every year (sort of like New Year's - it doesn't count) and every leap year 2 free days instead of one.

I forget which culture it was - the Mayans or one of those, they had 12 months of 30 days, and 5 'party' days. but maybe that is my imagination.

[Belgarath]

FWIW, I come down on the side that deferrals shouldn't have been withheld. Assuming the plan specifically defines the entry date to be, in this case, January 1 of 2015, and assuming the plan requires employment on the entry date, it seems like a stretch to me to say it is ok to withhold deferrals when they clearly terminated employment prior to the entry date.

[hr for me]

Any plan will have timing issues between payroll dates and hire/entry/term dates. And honestly depending on the termination date, there may not have been time to get that information to payroll to stop the deferral on that compensation -- most require a 3-5 day notice. Even if you amend the plan compensation definition to not include post termination pay, you still have to decide if that is the day they terminate or the day of payroll that includes that last day. Most I have seen include the last check and have a deferral from that last check for the percentage of the days worked.

Honestly I could see this one argued two ways (1) not eligible for participation because terminated prior to the entry date or (2) eligible because they had compensation on a paydate after their term date. Since compensation post termination is included in the definition of plan compensation, it seems that you have two plan specifics and recordkeeping sequences that do not match.

What does your plan state about conflicting plan issues? Or is it silent?

[GMK]

Also FWIW, this is an eligibility question. If the Plan Doc says they have to get to the entry date to be considered Participants, then they aren't Participants and cannot defer. If they became Participants prior to the entry date, that is, if they were Participants when they terminated, then you look at pay timing and such.

[John Feldt ERPA CPC QPA]

Suppose the employee quit (fired) November 30, 2014 and had just turned in a deferral election form the day before for 2015. The get no "regular" paychecks after November 30.

Also suppose their normal entry date would have been 1-1-2015.

Then on February 14, 2015 their 2014 "commission" gets paid. Longer lag in time, but the same answer to the above question should also apply here too, right?

[My 2 cents]

Suppose the employee quit (fired) November 30, 2014 and had just turned in a deferral election form the day before for 2015. The get no "regular" paychecks after November 30.

Also suppose their normal entry date would have been 1-1-2015.

Then on February 14, 2015 their 2014 "commission" gets paid. Longer lag in time, but the same answer to the above question should also apply here too, right?

If the plan required the person to be an active employee on the participation date, same answer. They would never have become a participant.

[Tom Poje]

I was thinking about this some more. let's say the person doesn't quit. he worked 3 days before his entry and 4 days after, so really you should pro-rate his comp that first week of deferrals because you can't defer before you enter into the plan.

[ESOP Guy]

I was thinking about this some more. let's say the person doesn't quit. he worked 3 days before his entry and 4 days after, so really you should pro-rate his comp that first week of deferrals because you can't defer before you enter into the plan.

I would disagree with the prorate idea. The whole pay check was paid after they entered so the deferral came after the person was in the plan.

[Tom Poje]

but that is more so out of convenience (thank goodness!). but they could have paid the person every day.

[Thomas Red]

Situation:

The plan has monthly entry dates. An employee is hired on 7/11, entering the plan on 8/1.  The employee leaves the company on 8/1. The pay period is 7/24 - 8/5.

Question:

Does the employer withhold deferrals for the day of 8/1? Does the employer withhold deferrals from 7/24 - 8/1? Does the employer not withhold any deferrals at all?

 

[Bri]

I say yes.  Employed for at least part of the day, everything which would normally apply to employees does so here.

[MWeddell]

As with most questions, read the plan document carefully.

For most plans, the deferral election applies to the entire 7/24 - 8/5 pay period before the compensation is paid on or after the 8/1 entry date.  For most plans, one continues to permit elective deferrals to made made from regular forms of compensation after the participant terminates employment until the later of 2½ months after termination or the end of the current plan year.