unused vacation pay

[cpc0506]

Client has a 403b plan which provides for a 10% profit sharing contribution. Client deposits the PS each pay period. (There are no allocation conditions to receive an Employer contribution.) Employee A terminated employment during the plan year. She was paid $4,000 in unused vacation pay with her final paycheck. I think this $4,000 is entitled to a PS allocation as well. Client is calling the pay 'severance' and did not contribute a profit sharing allocation for this pay.

What are your thoughts?

[QDROphile]

You know that you are going to receive at least one response that asks what the plan says. The definition of compensation for purposes of the profit sharing contribution is relevant. The vacation pay policy may also shed some light on the matter. For example, if unused vacation can be cashed out every year, it is not likely to be treated as severance under the plan for a participant who terminates. In the abstract, amounts that are included in the final check tend to be included in compensation for contribution purposes, such as eligibility for elective deferral.

[cpc0506]

Compensation for all purposes is defined as: Code §3401 federal income tax withholding wages increased by Elective Deferrals. The only other special provision is that the plan uses participation compensation for any ER contribution for a participant's first year in plan.

[QDROphile]

Was the amount delivered on or before the last day or work?

If so, I would have to be presented with something else before I would believe the amount should be excluded from the contribution calculation.

If not, I would look at the annual addition terms because those terms might address amounts paid after separation from service.

[cpc0506]

I was told it was delivered with the final paycheck that she received, which was the next pay period after her term date.

[ESOP Guy]

It doesn't sound like it would meet the definition of post severance comp in the regulations. Check the plan definition again. Most seem at some point talk about earned for service or not and so forth.

[hr for me]

Also you might check to see what state wage law is in terms of vacation pay. For example, CA vacation pay is earned without forfeit so it could not be considered severance. Many states though are employer's written policy and a few others have other weird complications. If the employer promises to pay out unused vacation time, I don't see where they could then reclassify it as a severance. They could however amend the plan to not pay any PS on any vacation pay as long as that meets a nondiscriminatory definition of compensation and would affect all employees.

So I agree with QDROPhile that it could shed some light.

[Calavera]

I don't think you can exclude the unused vacation pay unless you actually amend the definition of compensation.

Additionally note that unused vacation pay paid no later than 2 1/2 months after the termination of employment was subjest of Post-EGTRRA "Good Faith" Amendment somewhere in 2009. At that time election could have been maid to include or exclude it for 415 compensation purposes. Not sure if this helps in any way.