Can the plan administrator withhold distribution from a terminated participant until his severance payments end?

[erisa parrot]

I ran across an interesting thread on a financial advice website. The OP is terminating employment on 6/22/2016. However, the administrator will not allow him to take a distribution after this date because he was still receiving severance payments, and therefore is technically active.

A couple of proclaimed administrators from "big banks" posted that this was accurate and was standard procedure.

If the plan document indicates the termination date is when you stop providing services, and it also provides for immediate distribution, I don't see how treating a participant "active" in this situation is correct. What further surprised me is multiple industry people confirmed it.

I am curious of the opinion of the people on this board, in case a similar situation comes up with a client.

[QDROphile]

Depends on definitions and interpretation of plan terms. It is a bad practice to treat someone as employed if they are not performing services and entitled to the usual perquisites of employment. Employers use it as a bright idea to solve various problems and they are kidding themselves as well as often violating state law. And don't send a message about ERISA preemption. I am making a more general point and not saying it is necessarily a violation of rules applicable to retirement plans

[GMK]

Maybe you can delay the distribution, especially if the Plan Document says you can, but FWIW, I view the severance payments as payments for services that the Participant already provided. On our records, if the person is not providing services after June 22, then the person would be inactive after June 22. But that's just me.

[david rigby]

The ER might consider that the EE could claim he is an active employee due to the ER's treatment of "severance" payments, and might also demand coverage under other benefits provided to active employees.

[hr for me]

But if they are paying out severance over time, I suspect they might also be continuing other benefits. Are 401k deferrals coming out of the severance payments? What about other employee deductions like health insurance premiums? It might truly depend on how the severance is structured if he had to sign some type of document/release of claims that states that he is considered active while in severance pay status. And often severance is paid out over time such that other benefits (especially health insurance) can be continued prior to COBRA coverage where the employee might have to pay 100% of the premium alone. In reality, it is more like suspending an employee with pay and benefits than terminating him/her for some companies/employers.

You would need to follow your plan document on whether severance/this situation is considered compensation or not. If not, depending on the distribution rules, the participant might have a case..

I am not so sure there would be a one-size-fits-all answer because you have a plan document and a severance agreement -- both with their own stipulations. I would think the plan doc would override any severance agreement and would hope HR would have considered that in setting up the severance package.

[Bird]

I view the severance payments as payments for services that the Participant already provided.

I agree with this. And other comments for that matter; it depends on how things are structured. But also depends on who is providing the answer.

Had a client receiving severance pay and they wouldn't let her take her money out of the plan because they said she was still employed, so we said "OK then she wants to make 401(k) contributions." Then they said she couldn't because...she wasn't employed. It took a couple of years for them to grasp the absurdity of it all and they released it.

[EBECatty]

I see these attempts regularly, and they always leave me uneasy. Generally the date a person has a severance from employment is based on all the facts and circumstances, which I view as the date they stop showing up for work, regardless of how long the employer says the employee will remain active. It may be possible to keep the employer-employee relationship genuinely intact during the severance period, but I think that's the exception rather than the rule. I'm fairly certain the IRS would take the same position in a plain vanilla case, i.e., employee stops performing services on June 22, but continues to receive a paycheck and health insurance until, say, September 30.

Employers doing this also need to keep in mind that their health insurer almost certainly deems these people separated for eligibility purposes, meaning the six months of "active employment" while they are getting severance pay will usually be considered the first six months of COBRA if audited by the insurer. Same goes for stop-loss carriers, who wouldn't hesitate to deny a major claim after the first 18 months (regardless of what the employer and employee call it) if the employee falls outside the contract's coverage terms.