last day provision

[EBDI]

This is a calendar year 401k plan that has a last day provision in order to receive the profit share contribution. Participant wants to know if they terminate on 12/31, do they get the contribution? Do they have to terminate on 1/1 in order to be employed on the last day?

[ESOP Guy]

I would say "yes". Every firm I have worked for would say you should say "yes"

This is however something the plan administrator has to decide. Every plan document give the administrator discretion to interpret the plan provisions in a consistent and nondiscriminatory manner that doesn't clearly contradict a plan provision or the law.

This is a classic example where that power should be used.

The plan administrator should make a determination as to the answer to this question and document it. After that everyone should be treated the same.

[jpod]

Last day of employment must be 12/31. What is so difficult about this?

[EBDI]

Some feel that if you terminate on the last day of the year, you are not eligible for the contribution. Others feel that if you worked the last day, then you are eligible for it. I wanted to see what other TPA's and Plan Sponsors are doing.

[GMK]

"Some" have their heads wedged.

If the requirement is that you have to be an employee on 12/31, then if you are employed by the company at any time during 12/31, you were an employee on 12/31. You go home as a retired person, never to return, but as jpod says, your last day of employment was 12/31. And it's hard to have a last day of work when you are not an employee.

BTW, did the company pay you (or owe you pay) for 12/31, or because you were not really employed that day, did you give them a free day of work? (Is that FLSA knocking?)

Now, if the requirement reads that you have to be an employee as of 11:59:59 of 12/31, that's a different matter. Check the Plan Document.

[ETA Consulting LLC]

As a rule, you cannot require conditions extending beyond the plan year end (i.e. 1/1) in order to receive an allocation. As a practical matter, I'm sure if you were to tell such terminating participant that the line was arbitrarily extended, there would be no year end terminations.

If you are 'employed at any time on 12/31', then you should receive the allocation. The part that 'may not' be subject to interpretation is when a top heavy contribution is due. Also, I'm with ESOP Guy that the Plan Administrator must interpret their plan. There is, however, another caveat; that interpretation must be reasonable.

Good Luck!

[EBDI]

Thanks for the advice. I will encourage the Plan Sponsor to go with terminating on 12/31 entitles them to a contribution.

[hr for me]

That always brings me back to an old argument we had with a client years ago about Date of Death on their conversion to SAP HR/Benefits. They wanted it to be the "date you were first fully dead the whole day". UGH!

If you worked at all on 12/31, you were an employee on 12/31.

Their argument was that if you were alive at all on a specific date, you were alive all day.

[rcline46]

What if 12/31 falls on Saturday or Sunday and your last day of work was Friday? What if your last day was 12/15 and you used up your vacation to the end of the year? Yes the Plan Administrator has to make the rules and stick with them.